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Sharp rise in financially distressed firms

The evaporation of consumer confidence in the face of job losses, tighter household budgets and the eurozone crisis has resulted in a sharp rise in firms experiencing “critical” financial distress across many UK business sectors.

Latest “Red Flag Alert” figures from insolvency specialist, Begbies Traynor, show:

1. The Travel and Tourism sector is coming under increasing pressure with further insolvencies now inevitable.

The industry has seen a 49% increase in companies facing “critical” distress compared to Q3 2010, and a 29% increase in companies facing “significant” financial distress compared with Q2 2011.

2. Across all sectors, Q3 saw a 23% increase in firms in “critical” financial distress, compared with a year earlier.

3. Companies with critical financial problems had liabilities of £62.5 billion during Q3 2011.

4. Deteriorating economic conditions have resulted in a 7% quarter-on-quarter rise in “significant” financial distress in the general retail sector.

5. Year-on-year, a range of sectors continue to show increasing levels of “critical” distress as follows: up by 41% in the Construction sector; by 53% in the Property sector and by 92% in Support Services.

Begbies Traynor executive chairman, Ric Traynor, comments: “A crisis of confidence did nothing to help retailers improve their prospects in the summer months .. [and] .. the months leading up to Christmas could make or break a number of high street names, leading to insolvency in 2012.”

He adds: “The levels of ‘significant’ financial distress in the Food and Drugs Retailing sector have risen by 12% in the past quarter – demonstrating that the downward pressure on the consumer is affecting even essential purchases and that consumers are battening down the hatches to protect against the forthcoming financial storm.”

When viewed on a regional basis, the figures are particularly alarming, with the North East, North West, Yorkshire, the Midlands, the East of England and Wales have all seeing a rise in the number of firms in “significant” or “critical” distress in the last three months.

Hardest hit with struggling enterprises is the beleaguered North East, which saw a 19% increase in distressed companies, followed by the North West with a 12% rise.

Yorkshire, the Midlands, Wales and the South West regions all saw increases in business distress of 10%.

Meanwhile, London and the South East have actually experienced a decrease in financially stretched businesses.

According to Mr Traynor: “As the threat of public sector job cuts became a reality in the past few months, a North South divide has begun to emerge with the South East and London areas showing much greater economic resilience than the rest of England and Wales.”

Figures from The Office for National Statistics (ONS) show that in the second quarter of 2011 the number of public sector employees fell by 111,000, marking the biggest quarterly decline since ONS records began in 1999.

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