Insolvency risk looms amid growing warnings of a UK recession. In the second quarter of 2022, corporate insolvencies rose by 13 per cent as 5629 companies went under, according to official data.
That means that registered company insolvencies increased by 81 percent compared to the same period last year. In addition, voluntary liquidations reached their highest levels since the 1960s.
The government said that company insolvencies were lower during the pandemic than previously. Compulsory liquidation, administration and CVA numbers remained lower throughout 2021 and were still lower than pre-pandemic levels in Q2 2022. “This is likely to have been driven in part by Government fiscal and other measures that were put in place to support businesses and individuals,” the report said.
This help included temporary restrictions on the use of statutory demands and certain winding-up petitions (leading to company compulsory liquidations). In addition, the government provided enhanced government financial help to companies at the beginning of the crisis. This support is now tapering off.
Businesses face soaring costs and weakening demand – partly driven by inflation and high energy costs. In addition, supply chain disruption has made key resources scarce at the same time as labour costs are rising and businesses are facing staff shortages.
The cost of living crisis also threatens to tip the UK economy into recession, according to the National Institute of Economic and Social Research.
“The UK economy is likely to enter recession in the third quarter of 2022 and remain there until the first quarter of 2023,” it said. It forecast GDP growth of 3.5 per cent in 2022, stalling to 0.5 per cent in 2023. In addition, unemployment could rise above 5 per cent over the next year as inflation hits 11 per cent.
“Three shocks have combined to shift real incomes onto a permanently lower path,” it said. “Brexit has raised the cost of imports from continental Europe and incentivised households to switch towards more expensive domestically-produced goods and services. The recent rise in energy prices has constituted a large terms-of-trade shock for the UK. Finally, discretionary fiscal tightening over the 2021-24 period, following the shock of Covid-19, has reduced the resources available to the private sector.”
While it expects earnings to rise by 6 per cent in 2022, it did not expect engrained domestic inflation to result from a wage-price spiral. “With prices settling indefinitely at a higher level relative to incomes, real household incomes are forecast to fall by 2.5 per cent in 2022 and remain over 7 per cent below their pre-Covid trend beyond 2026,” it said.