There has been an “unprecedented” rise in the number of businesses on the brink of insolvency, according to a closely watched report.
The latest Red Flag Alert report by Begbies Traynor, an insolvency specialist, showed those in critical financial distress rose by 50% in the three months to December compared to June-August.
It said that 46,583 businesses were clinging on with consumer-facing firms, such as hospitality businesses, bearing the brunt of the deterioration.
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It added that there were “notable” increases in financial stress across 21 of the 22 sectors of the economy that the study covered.
The report pointed to pressures on many fronts from rising energy costs, budget tax measures, high interest rates and weak consumer demand.
The report was published as a key measure of the latter, released once a month by market research company GfK, and showed consumer confidence at its lowest level since December 2023.
All five of the survey’s components, including the outlook for personal finances and the economy, declined.
The findings of both reports chime with a slew of downbeat economic signals since Labour’s election victory, with stagnation taking hold on a quarterly basis.
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‘We need to grow our economy’
Chancellor Rachel Reeves warned in late July of a tough budget ahead to plug a £22bn “black hole” in the public finances that a Treasury review was said to have uncovered.
The budget is set to raise taxes on businesses, from April, by £25bn to help increase funding for investment and public services but firms argue the financial hit will just result in lower investment, higher prices, and job losses across the board.
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Reeves risks economic ‘doom loop’
Julie Palmer, partner at Begbies Traynor, said of the Red Flag Alert’s findings: “Across nearly every sector, there has been an unprecedented level of growth in the number of firms who are at serious risk of entering insolvency in the next 12 months.
“The fact that the distress is being felt across almost every corner of the economy highlights how difficult the outlook is for UK businesses right now.
“After a disappointing Christmas, consumer-facing industries, in particular, are feeling the strain, with rising operational costs and higher wages adding to an already difficult situation.
“With many such businesses already operating on thin margins, I fear the current situation will undoubtedly push some over the edge.
“Indeed, at a time when consumer confidence is so volatile and borrowing costs look likely to be structurally higher for the foreseeable future, the situation feels very precarious.
“Sadly, this has only been exacerbated by the tax rises and increase in national minimum wage levied on businesses during the October 2024 UK budget which means the financial strain on businesses will only increase later this year.”
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The government has consistently defended the budget, saying it will lay the foundations for growth that the country so badly needs.
Public investment is forecast, by economists, to help output pick up in the second half of the year.
However, many caution that the response by businesses to the budget will also be crucial.