Credit reference firm Graydon is expecting the number of UK insolvencies to continue to fall, but has issued a stark warning that many struggling firms could be just months away from disaster.
The Graydon Insolvency Predictor forecasts that business failures during 2010’s third quarter will fall 5.7 per cent sequentially and six per cent in comparison with Q3 2009. However, they are still expected to be up 12.5 per cent on the same period in 2008, right at the start of the economic meltdown.
Graydon pointed out that this recession has been different to the downturn of the early 1990s as insolvencies have not continued to increase as the economy slowly recovers. The credit reference firm attributes the “artificially low” failure rates to factors such as quantitative easing, lack of credit and HMRC’s Time to Pay tax deferral scheme.
Graydon’s UK managing director Martin Williams said the insolvency stats were a potentially misleading economic barometer.
“HMRC is supporting an estimated 80,000 companies that under normal circumstances may well have collapsed,” he added. “Compare this with the 19,000 companies that failed during the whole of 2009 at the height of the credit crunch and we begin to see just how bad the rate of company failures could have become without government intervention.”
The Graydon Insolvency Predictor forecasts that business failures will begin to rise again early next year, which could foreshadow the feared double-dip recession.
Adam Harris, chief executive of the Technology Channels Association, said it was not yet clear whether or not the economy would lurch into another sharp contraction. But the trade body chief said business failures would inevitably begin to rise again around February next year.
“The Time to Pay issue is going to be a big one,” he said. “A lot of unsustainable businesses have been given the opportunity to live for another six to 12 months by the scheme.”
But Harris asserted that many channel players have used the time to move their businesses towards more sustainable models.
“The channel will be hit,” he said. “But a lot of IT companies have gone towards service-based models. The extra 12 months may have seen them move from break-fix towards monthly maintenance revenues.”
Another issue expected to fuel a rise in insolvencies in 2011 is the upcoming spending review and resultant cuts to public spending. Nitin Joshi, founder of ChannelMoney, said casualties at the lower end of the channel would continue to pile up.
“One problem is there is not enough business around,” he said. “Not just in the public sector, but also large corporates, which are sticking with what they have got.”
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