Are more corporate insolvencies on the way in 2023?

Paul Madden
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The year 2022 ended on a low note, a long way from the hopes of a post-pandemic upturn we had at the start of the year.

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Prospects for 2023, by contrast, look gloomy to say the least, with concerns about another difficult year for the UK economy in which growth is at a standstill, while inflation has reached new heights.

The Bank of England, keen to avoid repeating the scenario of the 1970s, has embarked on a cycle of monetary tightening. This will only come to an end – both HM Treasury and the Bank assert - when prices are more settled; however, the cost just might be a new recession.

Periods marked by tighter financial conditions - particularly when as restrictive as they are now - typically have an impact on the number of insolvencies. This is all the more so when combined with other factors placing strain on the profitability of companies, which is currently the case given the steep rise in, or continuing high levels of, the price of inputs and commodities. At the same time, many corporate cash-flows are starting 2023 in a much less favourable position than a year ago - especially in the most energy-intensive areas of the manufacturing sector.

The much-reduced number of insolvencies resulting from the Covid-19 pandemic is set to disappear for two key reasons. The first relates to government intervention, which is under much more pressure now than two years ago due to the return of inflation and the conflicting objectives with monetary policy. Whilst budgetary support introduced during the pandemic was unprecedented in the most advanced economies, the UK and indeed countries in Europe are now much more cautious about spending. The ‘whatever the cost’ approach adopted by the UK government, in keeping with its counterparts across Europe, is now clearly behind us.

The second reason relates to the “essential” nature of the current crisis, which is very different from the Covid-19 pandemic emergency - largely a temporary shock that extinguished almost all the variable costs borne by companies. The current crisis, on the other hand, has led to increased costs across the board that no government can be expected to permanently bear in their entirety.

In these conditions, it is difficult not to anticipate a steep rise in corporate insolvencies over the coming months. However, notwithstanding the challenges set out above, we do not anticipate the tidal wave of failures that some have predicted.