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An Insolvency Practitioner’s perspective on the economy

Some say we are on the brink of a major slow down. Clearly the economy is not as strong as it has been, but surely the real questions are:

  • just how sharp is the ‘adjustment’ likely to be;
  • how long will it last; and
  • where will it be felt most?

Let’s look back over some recent figures and at the same time consider what the future may hold:

  • Currently GDP is growing at 2.9% pa and is expected to fall to under 2% over the next few months. Research has shown a 1% drop in GDP growth could lead to a 10% increase in corporate insolvencies (see our previous post). The economy has been incredibly resilient throughout the last decade, but the credit crunch has ended that period of stability.
  • Whilst inflation is presently running just above the government’s target at just 2.2%, the Bank of England is forecasting a rise to over 3% in the near future giving rise to further pressures on disposable income. 
  • House prices are weakening generally across the country, although less so in London. The recent reduction in loan to value ratios and income multiples on offer will restrict mortgage funding and reduce both demand and consumer confidence.
  • Total personal debt levels, at £1.4 trillion, are huge and growing at £1 million every 5 minutes, more than three times the rate of inflation. The growth in personal debt may be slowing, but record numbers of personal insolvencies and a significant number of borrowers defaulting support the trend towards less excessive consumer spending.

In summary, the main aspects of the economy are less volatile than, say, the 1980s to early '90s when huge swings could be expected. The economy has certainly become more unstable during the last 6 months, but overall, I expect the ‘adjustment’ to be relatively shallow and short-lived, with the pain being suffered more in particular regions or sectors :

  • Retailers who enjoy a strong market position and are well organised and managed are likely to fare better than their weaker competitors. Suppliers of ‘growth support services’ into retailers, such as shopfitters, can expect a further deterioration in both sales volumes and margins, causing viability and solvency issues (see previous post).
  • Pubs and restaurants have already seen their takings fall as a result of consumers’ reduced free cash, the smoking ban, and cheap supermarket alcohol. Fixed costs remain high, and leisure outlets with poor procedures and low staff morale are at risk.
  • Confidence is low in the construction industry, despite the Olympics Effect and government housing requirements. Many construction related companies will not be able to cope with any further reduction in prices or any deferral of work or payment by the major employers(see previous post).

The slow down in these parts of the economy will no doubt create added opportunities for Insolvency Practitioners to bring their turnaround skills to bear to rescue ailing but viable businesses, as well as to assist in close down scenarios. As always, early attention to potential problems increases the likelihood that a turnaround will be achievable.



Date: 10th March, 2008
Author: Peter Godfrey-Evans


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