An Economy in Collapse: How COVID-19 Could Impact the Insolvency Industry
The COVID-19 pandemic has had each and every one of us bear witness to a human health emergency of astronomical proportions, with extreme and wide-ranging economic impacts across the globe.
The UK (like every other country) is undoubtedly in the early stages of a decidedly aggressive recession, with the world economy set to shrink by roughly 5%. Today, I’m keen to briefly consider how this economic onslaught could be poised to impact the insolvency industry here in the UK.
In the wake of the pandemic, as government, industry and individuals continue to navigate the constantly evolving social, political and economic landscape, there is expected to be a sharp fall in the income of many as job losses and reduced incomes proliferate. In a country where credit and debt is such an engrained and normalised aspect of our financial culture, it is likely that many will suddenly find themselves unable to cope with what had been, pre-pandemic, a manageable level of debt. This is not only true for individuals, of course, but for businesses too, who may be increasingly likely to file for compulsory liquidation over the next twelve months. From February and March 2020, the pandemic hugely reduced the revenues of a great number of businesses. Hardest hit were those within the retail, airline, events, and hospitality sectors, where many businesses were required to more or less cease operations entirely due to their reliance on face-to-face operations.
Interestingly, a rapid consensus had emerged in early 2020 predicting a significant increase in business insolvencies as a result of the inevitable economic downturn. However, the rate of business insolvencies actually dropped in the second and third quarters of 2020, suggesting a degree of hope. Unfortunately, it is not hard to make the link between this sudden decrease in insolvencies with the unprecedented levels of fiscal support being distributed to business owners, as governments attempted to support businesses through the worst of the pandemic.
From a historical perspective, severe economic shifts are always indicative of a potential rise in insolvencies. For instance, following on from the 2008 crash, a 23% rise in insolvencies was witnessed in the first 12 months of the recession, as small businesses in particular struggled to recover. Like a great number of economic crises that have gone before, the recession we are currently on the brink of is surely set to trigger unemployment, credit squeezes, rising government debt levels and interrupted global value chains. These crises merely may take several quarters to peak, that’s all. Further stressing the situation in the UK, of course, is the economic uncertainty caused by Brexit. It’s rather unsurprising therefore, that the United Kingdom is emerging in the aftermath of the pandemic as the country with the highest GDP contraction in the whole of Northern Europe.
Ultimately, once support measures are withdrawn, the long term economic impact of COVID-19 is extremely likely to trigger a great number of indebted businesses to become close to – if not entirely – insolvent, with small businesses likely to be hit the hardest. Thus, with UK insolvencies predicted to rise by an astronomical 43% according to figures released by Euler Hermes, UK insolvency firms are advised to expect growing numbers of cases over the coming year and to prepare themselves accordingly.