Friday February 9, 2024

Restructuring Advisory Partner David Hudson considers the outlook for corporates

There’s no denying that the latest insolvency figures make for uncomfortable reading. In 2023, there were more than 25,000 registered company insolvencies, the highest annual number since 1993 and 14% higher than 2022.

The chances of 2024 following suit are high. Indeed, the latest figures published by the Insolvency Service come as the number of listed UK companies issuing profit warnings in a year exceeded the level reached during the 2008 financial crisis, with more than one in six (18%) businesses issuing warnings during 2023.

Our expectation is that the challenges of the past few years – going back as far as the pandemic – will manifest far more visibly across the economy in 2024. Notably, last year’s figures include a high proportion of company voluntary arrangements – pointing to closures among a broad range of SMEs and sole traders. Of concern is that there has been limited movement in the mid-market, where the impact of firms going out of business is likely to have far greater ramifications both up and down the supply chain. A larger stone ultimately ripples far wider.

Risks and rates

Regardless of size, a key consideration – which business leaders have little say in – is when the Bank of England will start to cut interest rates, with high borrowing costs continuing to hamper investment plans.

Rates are an important tool in tackling inflation and have proved effective on the surface; the Consumer Price Index more than halved from 10.5% in 2022, to 4% in 2023. At the start of 2024, it was widely anticipated that inflation could hit the Bank’s 2% target quite quickly, pre-empting the start of a series of rate cuts from the current 16-year high of 5.25%. However, more recent volatility has given rate setters food for thought. Indeed, the Bank’s latest decision saw a split among its Monetary Policy Committee – with the relatively small panel voting in favour of all three possible outcomes.

Regardless of when rates start to come down, we can be certain of borrowing costs – often fixed in over a three-year period – remaining elevated well above previously low levels.

Supply chain disruption

With the economic challenges linked to Russia’s ongoing war with Ukraine – namely heightened energy costs – beginning to smooth out almost two years since they began, businesses are now beginning to feel the impact of conflict elsewhere. Increasing unrest in the Middle East has created additional shipping costs for firms avoiding the Red Sea and disrupted supply chains. With consumer confidence already low due to the increased cost of living, firms will need to consider carefully whether to raise prices or look to absorb those costs to the detriment of their bottom line.

Rising wages

The new calendar and tax years also bring with them employee appraisals – narratives of which will undoubtedly be shaped by increased mortgage rates filtering through the market. The last readings showed wages increasing seven per cent year-on-year, while the National Living Wage is due to increase by 10% in April. At the same time, business rates will increase in line with September’s 6.7% rate of inflation – adding to firms’ overheads.

Taken together, all these factors suggest capital and debt costs will stay high, with limited prospects of consumer confidence rebounding. But the outlook is by no means certain. If recent times have taught us anything, it’s to expect the unexpected while controlling the controllables. In this environment, keeping a close eye on fundamentals like cash flow forecasts and working capital will prove critical and management teams must plan for every scenario.

However things play out, it’s those that are able to adapt and embrace change that will survive and thrive.