Low levels of business failure could be painting a misleading picture of the strength of the local economy, an insolvency specialist has warned.
The UK’s slow economic recovery is handing businesses time to adapt their strategies to survive, while low interest rates are creating conditions where creditors are less likely to pull the plug, according to Andrew McTear, partner at Norwich-based McTear Williams and Wood. His comments have been underpinned by the firm’s East Anglia business distress index, which shows the number of firm’s mounting losses has remained steady, despite company failures sitting at a near all-time low.
The results show that over the last four years about 130 to 135 companies have recorded losses or balance sheet insolvency, but the number of insolvencies in the region has fluctuated, reaching highs of more than 160 companies in 2011 before falling to 84 companies in the third quarter of this year. Mr McTear said: “Since the Q3 2009, the economic recovery in the UK has been the slowest since the Second World War and this seems to have created the perfect sweet spot where the business environment is neither too cold nor too hot giving companies time to adapt their business models to survive. “A further reason is ultra-low interest rates which reduce the cost of money and seems to have made creditors more lenient. In this benign economic environment even struggling businesses are mostly ticking along just so and there is little reason for creditors to take a hard line. “With interest rates set to remain low and growth in Europe subdued the only blot on the horizon would be a serious economic downturn. In that scenario already weakened companies could get caught by mounting trading losses and sharp reversal in attitudes to credit risk. That prospect currently seems a long way off and for managers of loss-making businesses there is still time restructure and build reserves for that rainy day.”
7 January 2015