Insolvency figures mask true state of economy

IN: Business news

The latest statistics from the Insolvency Service for the third quarter show there was a 2.6 per cent fall in the number of company liquidations in England and Wales.

undefinedThe data shows there were 3,875 compulsory liquidations and creditors’ voluntary liquidations, also down by 2.0 per cent on the same quarter in 2012.

This total was made up of 964 compulsory liquidations and 2,911 creditors’ voluntary liquidations.

In the 12 months to the end of June 2013, 0.6 per cent or one in every 159 companies in the UK went into liquidation, down from one in every 155 in the previous quarter.

On the surface, falling levels of insolvency appears to show that firms have negotiated their way through the downturn and as the economy improves, less companies are going out of business.

The UK economy grew by 0.8 per cent in the third quarter, according to the latest official figures, following on from growth of 0.4 per cent and 0.7 per cent in the first and second quarters.

However, John Alexander, insolvency practitioner and partner at London chartered accountants Carter Backer Winter thinks the falling levels of insolvencies shows that the UK economy is still “bumping along the bottom of the economic cycle.”

He said: “The new figures indicate that either the historical cycle of business performance during a recession and a recovery has been destroyed, or the economy isn't recovering as well as expected.

“The pattern established following previous recessions is that more businesses go bust as the economy recovers, not less. Typically, businesses that have bad debts slowly wind down during a recession until they eventually run out of cash. Economic growth is often the last straw for companies; they need to fill new orders and recruit more staff to meet demand, but can't get any more credit.”

Following the recession in the early 1990’s insolvency levels reached a peak of 2.6 per cent in 1993 as the economy recovered, more than four times the current rate and more than double the average of 1.2 per cent seen over the last 25 years.

“The retail trade will receive a fillip from Christmas shopping that will enable some retailers to paper over the cracks for a while. Many will manage to hang on until they are paid; but taxes, rates and rents early in 2014 could result in a flurry of new insolvencies in the retail sector,” added Mr Alexander.

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