Which sectors are most affected by corporate insolvencies?
September 2, 2022
When the Insolvency Service published its statistics for the second quarter of 2022, all the attention was on the headline, overall numbers. There were 5,629 corporate insolvencies in England & Wales in Q2 2022, an increase of 12.7% compared to Q1 2022’s figures of 4,995 and an increase of 81.3% compared to Q2 2021 (3,105).
The more meaningful comparison given the restrictions on creditor enforcement during the pandemic is to look back to the equivalent period before Coronavirus, Q2 2019 when there were 4,321 company failures. On this basis we are now running 30% higher than before Covid laid waste to much of the UK economy.
Just as worrying is the cumulative figure for 2022 to date, taking into account the July figures published after the quarterly analysis. In the first seven months there have been 13,212 insolvencies across the whole of the UK, equivalent to an annualised figure of over 22,500. On this basis, 2022 could turn out to be the worst year on record for business insolvency, eclipsing the previous peak following the global financial crisis which started in 2008.
Sector variations in corporate insolvencies
These numbers hide significant variations between how different sectors within the economy are experiencing insolvencies. We have used the Insolvency Service’s industry analysis for England & Wales to look at relative performances compared to Q2 2021 and Q2 2019 (pre-pandemic). There is a minor statistical quirk because the Insolvency Service’s Q2 2022 industry breakdown relates to a slightly lower number of failures than their overall figures, but this does not make a material difference to our research.
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Which sectors are most affected?
Health and social care – up 129% vs Q2 2021 and 51% vs. Q2 2019
Although relatively small in terms of absolute numbers (128 failures in Q2 2022), the impact of the pandemic and labour market issues made survival difficult, especially for smaller, less well-capitalised social care providers.
Real estate activities – up 128% vs Q2 2021 and 46% vs. Q2 2019
No sector was as harshly treated by the government in its efforts to preserve businesses impacted by the pandemic, as landlords had all of their debt enforcement tools neutralised for two years while even some profitable and cash-rich major tenants took advantage by withholding rent payments. Traditional estate agents were also restricted by biosecurity considerations, as well as suffering from enhanced competition from online disruptors. Property was the second worst performer on insolvencies across the two comparatives.
Wholesale & retail – up 122% vs Q2 2021 and 32% vs Q2 2019
Wholesale businesses were savaged by supply chain disruption caused by the pandemic and labour shortages driven by both Covid and Brexit. Bricks and mortar-dominated retailers suffered extended closures and had to make huge investments in both biosecurity and ramping up their online offering.
Manufacturing – up 100% vs. Q2 2021 and 24% vs Q2 2019
Here too, supply chain and Brexit disruption were rife, as were fluctuations in demand from their customers further up the commercial food chain. Covid absenteeism made efficient operation difficult to maintain in labour-intensive parts of the sector, notably food processing.
Education – up 88% vs Q2 2021 and 94% vs. Q2 2019
Another small sector in absolute numbers (just 60 insolvencies in Q2 2022), but the worst performer of all when compared with pre-pandemic. The bulk of these collapses will have been amongst the specialist education supply chain, rather than actual providers such as schools and higher education establishments, as home schooling reduced the volume of services required.
Which sectors are bucking the trend?
Construction – up 74% vs Q2 2021 and 26% vs. Q2 2019
Despite always being the sector with the biggest percentage of insolvencies (usually close to 20% of all failures), construction has matched the average for the whole economy on both comparisons. This may reflect the impressive speed with which the industry got back to work after the initial shock of Coronavirus, but it is surprising given the significant increases in input material and labour costs it has suffered. It suggests that contract pricing flexibility is greater than past experience would suggest. It may be that the pernicious influence of fixed price contracts is finally waning, especially in the sub-contractor part of the construction supply chain.
Transportation and storage – up 44% vs Q2 2021 and 39% vs Q2 2019
The logistics sector has featured in many media stories about the impact of the pandemic’s supply chain difficulties and labour market shortages, particularly of HGV drivers. It may be one of the few parts of the economy where Brexit has had a positive impact overall as businesses re-shored activities and manufacturers went from ‘just in time’ on their inventory strategy to ‘just in case’, needing more warehousing as a consequence.
Professional, scientific and technical services – up 48% on Q2 2021 and 34% vs. Q2 2019
Supply chain issues are less problematical here and the ability to relocate the labour force relatively easily onto a WFH basis have helped limit operational and financial disruption.
Accommodation and food services – up 59% on Q2 2021 and only 2% vs Q2 2019
This is probably the most surprising outcome, until the extent of government support is taken into account. The list of measures was endless: VAT reduction, business rates holiday, the Eat Out to Help Out scheme, local grants, landlord and creditor enforcement bans, HMRC deferrals and Time To Pay deals and no questions asked loans through the Bounce Back scheme. Our recent market sector research on the hospitality industry shows that some aspects of the finances of the sector have actually improved during the pandemic, although from a very low base.
The arts, entertainment and recreation – up 59% vs Q2 2021 and 48% vs Q2 2019
Here too there was endless media speculation about the damage caused to this sector by the pandemic. What may have been the saving grace is the deep community roots that so many of its enterprises have and the strong tradition of support through generous donations by their patrons and other local people and businesses.
Administrative and support services – up 63% on Q2 2021 and 37% on Q2 2019
Similar considerations apply here as for professional services. This contrasts with the experience of those services, which are consumer-facing.
What next for corporate insolvencies and where might they hit hardest?
With the sheer magnitude of the energy crisis, the speed with which inflation is accelerating and where it might peak and ongoing labour shortages, the fear is that corporate insolvency volumes could accelerate over the next year or longer. Where corporate insolvencies will fall amongst industry sectors is anyone’s guess. Winners may become losers and vice versa. What is certain is that the road ahead looks seriously bumpy and the financial risks are likely to be extreme for many businesses.
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As a Group, Opus is here to advise and help businesses facing problems with cash flow, debt and business finance. We have extensive experience of identifying and implementing positive solutions in these scenarios. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.