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Insolvencies: The worst is yet to come

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21st Oct 2009
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Peak figures for unemployment and personal and corporate insolvency are on the way, according to a red flag report from recovery and restructuring specialists Begbies Traynor.

The UK may at the mid point of a ‘W’ shaped recession, with a deluge of business failures still ahead of us in 2010, according to the latest Begbies Traynor report.

The report notes that statistics from recessions over the past 40 years show that insolvencies peak between one and two years after GDP stops shrinking. Scarce credit after this recession may intensify this effect, it claims, which may cause a substantial rise in insolvencies during 2010 and into 2011.

Sectors most impacted by adverse actions in Q3 2009 were engineering and recruitment, with critical actions up 31% and 12% respectively on last year.  Engineering companies form a large part of supply chains to major manufacturing operations and industrial projects, making them most vulnerable in the current climate. The recruitment sector is a victim of rising unemployment, which typically continues and peaks well after the end of GDP shrinkage.

“The third quarter statistics demonstrate that the UK may be in the eye of the storm. The well-intentioned government efforts to prop up struggling companies may provide a necessary lifeline in the short-term, but will ultimately prove futile in many cases”, said Ric Traynor, chairman of Begbies Traynor Group.

While banks and trade creditors are holding off wherever possible in the hope that business fortunes may improve, the worst may be yet to come, according to Traynor: “Experience of the last four recessions tells us that unemployment levels and corporate and personal insolvencies are lagging indicators, and thus seem certain to rise in 2010”.

 

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