Decrease in corporate insolvencies in United Kingdom

The HM Revenue and Customs [HMRC] `time to pay? scheme, allowing viable customers who cannot pay to make payments over a longer period, is improving the insolvency figures.
Analisis Credito y Caución
Madrid - 17-nov-2010

The UKs GDP grew 1.2% in Q2 of 2010, following 0.3% growth in Q1. The level of growth came as a surprise to many and was very much down to a better than anticipated performance in both construction and finance services. There are many conflicting views on forecasts for the rest of the year, but most analysts believe that we will probably see growth of around 1.5% for the 12 month period - and so effectively flat for the remainder of the year. The UK trade deficit widened again in July 2010, to £4.9 billion, an increase on the £3.9 billion deficit seen in June. This is disappointing, as it again emphasises that growth is not coming from an increase in exports, which is itself surprising in view of the continuing weakness of Sterling against other major currencies.

There are signs that many businesses have maintained their prices and increased their margin, but have not driven volume to take advantage of the favourable exchange rate. The good news is that early indicators suggest that exports did pick up in August, as a result of an increase in world demand brought about by a combination of rapid growth in emerging markets and a slight improvement in the Eurozone.

According to Credito y Caución, businesses in Great Britain were still susceptible to payment delays throughout the supply chain, and regardless of size. Around half of the British businesses surveyed told us that they had experienced delays, requests for extended terms and increased credit, indicating potential additional payment risk.

The latest insolvency figures show that there were 4,080 compulsory liquidations and creditors voluntary liquidations in England and Wales in Q2 of 2010: an increase of 0.5% on Q1 and a decrease of 19.1% on the 2009 figure. Compared to previous recessions, this comes as a surprise as, generally, insolvencies continue to rise for a number of months even after the economy has returned to growth. It is highly likely that the HM Revenue and Customs (HMRC) time to pay scheme (allowing viable customers who cannot pay by due date to make payments over a longer period) continues to improve the insolvency figures, but only time will tell, as some companies will struggle to catch up with their deferred tax payments.

HMRC are taking a far less lenient stance with new businesses that are now looking to take advantage of this scheme. Nevertheless, Crédito y Caución expects corporate insolvencies to decrease 10% year-on-year this year and further 5% in 2011.

Business loans remain a problem

The availability of bank lending to UK businesses continues to be a real problem, especially for SMEs as they attempt to come out of the cycle and return to growth. June figures showed a net monthly contraction of £3.5 billion, following the £3.3 billion contraction of the previous two months. Early indications are that figures for July were also weak and are unlikely to provide any evidence of a more lenient approach being taken by financial institutions. While some overseas banks are now looking beyond their own domestic markets, indications are that they are looking to grow their portfolios in emerging markets rather than reopening the door in traditional markets such as the UK.

In our previous UK report, we referred to the decision by the new coalition government to take immediate action in an attempt to reduce the deficit by means of an emergency budget. There is no doubt that public sector spending cuts have already started to have a negative impact, especially on those industries heavily reliant on public sector contracts, such as construction and IT. To give some idea of the scale of the cuts, while total government spending in 2008 and 2009 was £620 billion, the new government has asked all its departments to come up with business plans that identify cuts of 40%, even though the likelihood is that this will ultimately be reduced to 25%.

While there are some signs of an improvement in the UK economy, the biggest challenge is finding the correct balance to reduce national debt without having a negative impact on growth. The coalition government has taken strong and decisive action, but only time will tell if this was too much too soon. In the meantime, Crédito y Caución continue to take an optimistic but cautious approach. Overall, the IMF recently forecast 2% GDP growth for the UK in 2011.

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