UK recovery accelerates with 39% decrease in 'Critical' distress

Sting in the tail - Chronically under-funded SME's at greatest risk of failure during recovery phase

Latest Red Flag Alert Report for Q2 2013

According to the latest Begbies Traynor Red Flag Alert research for Q2 2013, which monitors the financial health of “Corporate UK”, levels of ‘Critical’ financial distress among UK businesses have fallen 39% compared to Q2 2012; the second highest year on year decrease since the beginning of 2011.

Across all sectors, UK businesses experiencing ‘Critical’ financial problems reduced from 4,947 in Q2 2012 to 3,001 in Q2 2013, indicating a significant turnaround in the health of the UK economy. On a quarterly basis, the improvement continued with levels of ‘Critical’ distress falling 9% from 3,283 in Q1 2013.

The number of UK businesses experiencing ‘Significant’ levels of financial distress remains high but is improving, albeit at a slower rate, reducing 18% year on year from 216,396 cases in Q2 2012 to 176,677 in Q2 2013, and on a quarterly basis falling 7% from 190,787 in Q1 2013.

Julie Palmer, Partner at Begbies Traynor, commented: “With critical distress levels falling at a record pace, this quarter’s improvement appears to be the first real sign that the UK economy has turned a corner towards a sustained recovery. However we have real fears that many SMEs will have serious financial difficulties at the time they least expect – during a recovery. Our experience has shown time and time again that many SMEs run out of cash during the recovery phase, as there is a real temptation to overtrade.

“Many of these companies at risk have been labelled as “Zombies” in the past but, with the majority having survived the worst of the recession, they are now chronically under-funded; benefitting from low interest rates and improving confidence but in desperate need of finance and, crucially, guidance to help them take advantage of the dawning economic recovery in an unfamiliar post-crisis market.

“To begin the process of guiding these businesses back to health, Begbies Traynor is currently developing a five-point corporate health manifesto, which we hope will encourage further debate on this topic and drive struggling businesses to seek out the support they need.”

Important sectors to the UK economy driving recovery

Leading the recovery with significant reductions in ‘Critical’ financial distress during the period are the Construction, Professional Services and Financial Services sectors, which decreased by 48%, 59% and 30% respectively year on year.

The UK’s manufacturing and industrial sectors also experienced considerable improvements in critical distress for the period, thanks to improving domestic and export demand in the quarter. Food and beverage manufacturing saw a 46% reduction in ‘Critical’ distress year-on-year, while industrial transport and logistics reduced 43% , automotive by 35% and the print and packaging sector, which improved by 35%.

Julie Palmer commented: “The UK services sector continues to prosper, growing in June 2013 to its highest level since March 2011 as incoming new business rose at its highest rate for six years and companies took on more staff than any time since late 2007¹. Meanwhile the financial services industry has benefited from improving market confidence as a result of increased business volumes now that RDR has bedded in, while house builders in particular are going from strength to strength thanks to an improved mortgage environment as well as popular government initiatives such as Help to Buy.

“However this improvement is by no means a uniform picture, with the legal sector under particular pressure following a raft of high profile insolvencies within the industry. Recently the Solicitors Regulation Authority reported that 160 legal practices are under intensive supervision, including 30 of the UK’s top 200 legal practices. Meanwhile, as a result of the implications of the new Alternative Business Structures and further reductions in legal spend budgets we expect to see further consolidation as high street, middle tier and some large regional practices look increasingly vulnerable.”

Consumer-facing sectors still struggling

The sectors most dependent on consumers’ disposable income including hotels, bars & restaurants and general retail were the industries that saw some of the largest quarter on quarter increases in ‘Critical’ distress, rising 39%, 27% and 7% respectively.

Julie Palmer commented: “The consumer-facing industries continue to struggle as shoppers maintain tight control over their purse strings at a time when disposable income has remained under pressure. Unseasonable spring weather has clearly had an impact on the hotels industry during Q2, with holiday goers avoiding early bookings given the uncertain weather conditions. In addition, aggressive expansion plans from major and budget operators, such as Premier Inn, appear to be squeezing the mid-sized chains and independent hotels, as the industry moves closer towards the budget airline model of advance booking discounts and competitive pricing.

“Most surprising of all is the poor performance of the bars and restaurants sector in Q2 which has seen a marked downturn following a much stronger first three months of this year, when it recorded the largest decrease in financial distress of any industry surveyed. However, as flagged in our last update in April, businesses in this sector were 2.5 times more likely to have adverse creditor actions against them than the average for companies across all sectors, which may go some way to explaining the fragility of this group.”

London recovery peaking, while other regions finally catch up

Comparing financial problems by region on a yearly basis, all regions across the UK experienced an improvement in ‘Critical’ distress, with Scotland and the North East seeing the largest reduction in distress levels, falling 71% and 69% respectively. When comparing Q2 2013 with Q1 2013, most regions continued the momentum with the North East, Yorkshire & Humberside and the East of England seeing the greatest improvement, with 21%, 18% and 14% reductions in ‘Critical’ distress respectively.

However, of the regions that experienced a positive shift during Q2 2013, London surprisingly saw the smallest improvement with just a 1% reduction in ‘Critical’ levels compared to the first quarter, suggesting that the other regions of the UK are finally catching up with the Capital, which has been consistently bucking the trend since the financial crisis began. On a quarterly basis, only Northern Ireland experienced a rise in ‘Critical’ distress, increasing by 4% during Q2 2013.

Julie Palmer added: “The latest regional comparisons indicate that while the vibrant London economy continues to grow, fuelled by its burgeoning residential property market, the other UK regions, particularly the North of England, seem to have finally turned a corner and are now helping to drive the recovery.”

Ric Traynor, Executive Chairman of Begbies Traynor Group, concluded: “This quarter the Red Flag statistics indicate that the UK economy has seen one of the largest improvements in corporate health in the last two years, aided by improving conditions and growing confidence across the UK’s core markets.

“However a new breed of chronically under-funded businesses may hold back the economy’s growth unless proper guidance is provided to this group of financial crisis survivors, many of whom require innovative support to restructure in order to avoid insolvency in the future and ensure they prosper as the UK economic recovery gains pace. Key to their survival will be improving the funding gap for SMEs and providing greater training for business leaders so they are better able to forecast their businesses’ future, especially in the SME community, while ensuring that tax and regulatory obstacles do not block their path to recovery.”

Critical problems by sector:

¹ Markit/CIPS UK Services PMI – 3 July 2013