Allianz Trade has launched its most recent Global Insolvency Report, providing new forecasts for the years 2023 and 2024.
According to the trade credit insurer, following a modest recovery in 2022 of +1%, global business insolvencies are expected to rise by +6% in 2023 and +10% in 2024.
Declining liquidity and profitability put sectors in jeopardy
The reason for the escalating number of insolvencies is a corporate revenue recession, which is intensifying due to reduced pricing power and weaker global demand.
As of the second quarter of 2023, revenue declines have been seen across all regions for the first time since the middle of 2020, marked by a -1.9% year-on-year change.
Coupled with persistently high costs, profitability is taking a hit, leading to rapidly deteriorating liquidity conditions that are unlikely to improve before 2025.
Aylin Somersan Coqui, CEO of Allianz Trade said, “Companies still have a sizable amount of excess cash, €3.4tn in the Eurozone and $2.5tn in the U.S. But these cash buffers remain highly concentrated in the hands of large firms and in specific sectors such as tech and consumer discretionary.”
“And in general, most companies are unable to increase their cash positions through operations in the context of lower-for-longer economic growth. All in all, we expect two accelerations in global business insolvencies, with +6% in 2023 and +10% in 2024, after +1% in 2022.”
Vulnerable industries face increasing pressures
In 2023, sectors like hospitality, transportation, and wholesale/retail find themselves in precarious situations. Other sectors, notably construction, are quickly catching up, as backlogs of work are nearing completion, especially in the residential segment.
Maxime Lemerle, Lead Analyst for Insolvency Research said, “At the same time, higher-for-longer interest rates are reducing demand in sectors such as real estate and durable goods, and will start pressuring solvency in highly indebted sectors, such as utilities and telecom, in addition to real estate, on both sides of the Atlantic.”
“Moreover, global WCR currently stand at a record high of 86 days, more than +2 days above pre-pandemic levels. Higher interest rates also make it even more expensive for companies to finance structurally higher working capital requirements (WCR), which poses risks for sectors such as construction and machinery and transport equipment.”.
Global trends in business insolvencies
By the end of 2023, most advanced economies will have completed the normalisation of business insolvency rates. Significant double-digit increases are expected in 55% of countries, including the United States, France, the Netherlands, Japan, and South Korea.
Three out of five countries globally are expected to return to pre-pandemic business insolvency levels by 2024’s end.
Aylin Somersan Coqui, CEO of Allianz Trade added, “Moreover, in a context of slowing global economic growth, payment terms are likely to lengthen, adding to the rise in insolvencies in the coming quarters: Global Days Sales Outstanding already stand above 60 days for 47% of firms. One additional day of payment delay is equivalent to a financing gap of $100bn in the U.S., $90bn in the EU and $140bn in China. With bank loans already drying up for SMEs, closing this financing gap could be a significant challenge.”
UK business insolvencies to maintain elevated levels
In the UK, Allianz Trade forecasts business insolvencies to persist at roughly 30% above 2019 levels through 2025. Significant contributors to the anticipated 2023 increase of +16%, translating to +3,900 cases, are the hospitality, trade, and manufacturing sectors.
These sectors have been weakened by a series of disruptions including Brexit-related concerns, the COVID-19 pandemic, and earlier rounds of monetary tightening.
The economic and financial outlook for 2024-2025 suggests only modest improvements as firms continue to face the challenges of repaying debt.