As the price of everything, including debt, continues to soar, life is getting harder and harder for the UK’s heavily indebted businesses.
Business insolvencies in the UK surged by 57% in 2022, to 22,109, according to the latest data from the Insolvency Service, a UK government agency that deals with bankruptcies and companies in liquidation. It is the highest number of insolvencies registered annually since 2009, at the height of the Global Financial Crisis.
Last year “was the year the insolvency dam burst,” said Christina Fitzgerald, the president of R3, the insolvency and restructuring trade body. Insolvencies peaked in the fourth quarter, underscoring the compounding pressures on companies grappling with surging costs and rapidly slowing economic activity.
“Supply-chain pressures, rising inflation and high energy prices have created a ‘trilemma’ of headwinds which many management teams will be experiencing simultaneously for the first time,” Samantha Keen, UK turnround and restructuring strategy partner at EY-Parthenon and president of the Insolvency Practitioners Association (IPA), told the Financial Times. “This stress is now deepening and spreading to all sectors of the economy as falling confidence affects investment decisions, contract renewals and access to credit.”
Other headwinds include soaring interest rates, falling consumer demand, nationwide strikes, lingering Brexit-induced supply chain issues, an epidemic of quiet quitting and both chronic and acutely bad government.
Closest to the Edge
None of this, of course, should come as a surprise. Of all the large economies in Europe, the UK’s is arguably closest to the cliff edge. As newspaper headlines trumpeted this week, the UK economy this year will probably fare worse than Russia’s sanction-hit economy, according to the IMF’s latest forecasts. But then the same could be said of many other European economies, including Germany and Italy.
Stagflation is gradually settling in across the continent. With energy prices still high (though not as high as feared some months ago), the specter of deindustrialization continues to loom over the EU’s industrial powerhouses, Germany and Italy. And the frantic efforts of central banks to bring inflation back under some semblance of control risks triggering not just an economic crash but also a financial one, as Nouriel Roubini warned in October:
It is much harder to achieve a soft landing under conditions of stagflationary negative supply shocks than it is when the economy is overheating because of excessive demand. Since World War II, there has never been a case where the Fed achieved a soft landing with inflation above 5% (it is currently above 8%) and unemployment below 5% (it is currently 3.7%). And if a hard landing is the baseline for the United States, it is even more likely in Europe, owing to the Russian energy shock, China’s slowdown, and the ECB falling even further behind the curve relative to the Fed.
As economic conditions deteriorate, life gets harder and harder for Europe’s heavily indebted households and businesses. As I cautioned in late August, Europe’s entirely self-inflicted energy crisis risks tipping legions of small businesses over the edge. In the UK, as just about everywhere else, many small in-person businesses only managed to weather the lockdowns of 2020-21 by taking on huge amounts of debt:
[In the UK] the only way the debt gets cancelled is if the business in question goes into insolvency. According to research published by the Bank of England in November 2021, 33% of small businesses [had] a level of debt more than 10 times their cash in the bank, versus 14% before the pandemic. Many of those businesses had never borrowed before and some would probably not have met pre-pandemic lending criteria.
In total, £73.8 billion has been lent under the UK’s coronavirus emergency lending programs — the equivalent of 3.5% of GDP. Almost two thirds of that money — £47 billion — went to 1.26 million small businesses — in a country of roughly 5 million businesses. Through the Bounce Back Loan program SMEs were able to borrow up to 25% of their revenues to a maximum of £50,000. The loans, interest-free for 12 months, are administrated by private-sector banks, but are 100% backed by the government.
Companies now have to pay off that debt, against the backdrop of one of the most hostile business environments of living memory. As an op-ed in The Times (of London) pointed out on Wednesday, Britain is reeling from a particularly nasty combination of supply-chain shocks:
The energy crisis has hit the country particularly hard given the extent of its reliance on gas in its energy mix. The workforce is shrinking as a result of rising inactivity due to post-pandemic ill health and early retirement as well as post-Brexit shortages of low-skilled workers in some sectors. Trade has recovered from lockdowns more slowly than comparable countries, held back by post-Brexit border controls. Investment has flatlined since 2016 with dire consequences for productivity growth.
The result, notes the article, is that the UK is now grappling with higher and stickier inflation than most other major economies. In December, consumer price inflation (CPI) was 10.5%, just slightly below the record high of 11.1% registered in October. In January, food price inflation hit a fresh record high of 16.7%.
The Bank of England’s response was to hike interest rates for the 10th time in a row, perhaps in the deluded hope that a hard landing can still be avoided. Or perhaps the BoE just wants to bring the whole damn edifice down. Rates are now at 4%, their highest level since the topsy-turvy days of October 2008. And with each fresh hike, it becomes harder for struggling companies to service their expanding debts. This is the result:
Last year, creditors’ voluntary liquidations (CVLs) hit their highest point in the time series since records began in 1960. This is largely because the relative proportions of insolvency types, between CVLs, compulsory liquidations and other types of insolvencies, have changed in recent years. In 2020 and 2021, CVL numbers were significantly lower due to the emergency support measures provided by government, such as the furlough program, emergency loan schemes and debt moratoriums.
But that support ended some time ago and for many businesses the time has now come to start paying back the 100% debt they accrued.
The government’s Bounce Back Loans scheme was first launched in May 2020. Over the next 18 months, more than a million small companies, some of them fronts for criminal shysters, took advantage of the scheme. On signing the loan, companies were given the chance to defer their payments for the first six months. When that six months was up, they were given another chance. And then another. But at the end of the third deferment period — i.e. 18 months after the loan was first issued — crunch time arrived.
For companies that took out a loan in December 2020, that moment will have arrived in June 2022. This is one of the main reasons why the number of insolvencies has surged over the past year. And the trend is likely to continue, if not intensify, in the coming months.
An Example from Close to Home
A company not set to bounce back anytime soon is a small, niche language school run by my father. The firm specialized in providing 3-4 week work experience placements in the West Midlands for EU students aged 17-20, predominantly from Germany. The company, which was set up in 1979, thrived in the period 2010-15 with many new further education colleges in Northern Germany coming on board, but that all changed once the Brexit referendum result was known.
Between 2015-19 the prevailing uncertainty – hard Brexit, soft Brexit, Norwegian- or Swiss-style future – meant the sale potential of the company was put indefinitely on hold. Then came Covid and the cancellation of all courses in 2020 and 2021 when not one single student applied for a placement.
Funds were running low, so my father took up the opportunity of applying for a £15,000 Bounce Back Loan (BBL) in August 2020. Repayment at a modest 2.5% could be shelved for 6 months, by which time a hard Brexit had been signed off. But for the company, the sucker punch was Johnson’s decision in early 2021, in another sop to the vitriolic right-wing European Research Group, to pull the UK out of Erasmus Plus, which provided financial support to young people across the EU and beyond pursuing educational and work experience opportunities in other countries.
In 2022, the loan repayment holiday was extended to 12, then finally to 18 months. Crunch time is in two weeks’ time, but the decision has been made. The pre-referendum sales potential of £100,000 has totally disappeared, the company is insolvent and has ceased trading. The liquidation process has begun, and the company cannot repay the loan.
Similar things are now happening to small and medium-size companies across the UK, particularly in the hospitality, retail and construction sectors. And it is also likely to begin happening, if it hasn’t already, across other parts of Europe as companies, particularly small and medium-sized ones, buckle under the combined weight of excessive debt, surging costs and plunging demand.
This is already happening in my country of residence, Spain, where some €23 billion of emergency loans (out of a grand total of €122 billion) — 80% of which are government guaranteed — are at risk of default and banks face an avalanche of lawsuits for misselling the loans. It would be interesting to hear from readers in other parts of Europe about the state of play with business bankruptcies in their own respective countries.
As I noted in my previous article, Europe’s Energy Crisis Is Tipping Legions of Small Businesses Over the Edge, if small business begin failing en masse, the effect on the economy is likely to be colossal. After all, small and micro companies make up the vast majority of businesses worldwide, representing around 90% of businesses and around half of employment globally. A mass extinction event could also trigger another crisis for Europe’s ever-fragile and fragmented banking system while also turbo charging wealth disparities.
Just as importantly, as I note in my book Scanned, “small businesses are the cornerstone of local communities, providing basic products and services, creating jobs, allowing local economies to flourish, and providing spaces and places for people to meet and engage with each other.” A world without them will be a much poorer one. It will also be a world even more dominated and controlled by corporations.
‘ “small businesses are the cornerstone of local communities, providing basic products and services, creating jobs, allowing local economies to flourish, and providing spaces and places for people to meet and engage with each other.” A world without them will be a much poorer one. It will also be a world even more dominated and controlled by corporations.’
I am thinking that this is the whole point. To wipe out small businesses and just to leave giant corporations instead in their place. Think on how all those defence corporations in the US in the 90s were told to amalgamate into just a few corporations – or else. And how hundreds of media corporations in the 90s were amalgamated into the present six left remaining. I do believe that this is the guiding ideal and maybe this came out of a Davos meeting. The elite do not care about local jobs or economies. Big corporations though mean that politicians can expect largess from them which would not be possible with a bunch of small businesses. So yes, it will be a poorer world but not for the few. And all this reminds me of one guy who said that humans can be compared to monkeys. That is, if you have thousands of monkeys starving to death just so that one monkey can sit on top of a huge pile of food.
The Defense companies did amalgamate in the 90s but…. to stay relevant and offer the services DOD needed they had to steadily consume more small businesses every year since then.
They aren’t unaware that it’s this dynamic that carves out new markets and new technology for them to exploit later on.
Yes, the enemy of big business is not government. Governments can be bought. The enemy of big business is small business which can take $ away from them. Personally, I’d rather patronize a family owned business than a multinational because a small business is accountable. And small restaurant food tastes better than processed food from a chain…better for me, too. And a social experience…
I am thinking that this is the whole point…
Dunno if it’s the whole point, but undoubtedly a salient effect, the reprecussions of which have been widely explored in a plethora amount of dystopian fiction.
But it looks like the Brits get to be first to truly live it– something of a different flavor than Soviet, or the many dictatorships and authoritarian regimes that mankind has already experienced: it’s a new dimension of Hell.
Quite honestly as a 30-something I’d be fairly happy living in post-war USSR compared to basically nearly my entire live in the capitalist dystopia that is the UK.
I can understand that. I left the UK a long time ago, in the late 80’s, and even then felt it was going badly off the rails. Now, I don’t even want to visit anymore. It seems to be turning rapidly into a police state.
Great post, Nick. Reminds me of the most useful of New Left Review’s Sidecar articles.
Thank you, hemeantwell. To borrow from Lambert, [Nick blushes modestly]
Wow. As much as I despise the US, this makes me happy to be petty bourgeoisie here rather than the UK. Covid was hard to survive, but PPP saved me. If I had to pay it back I would be out of business. I’m not praising PPP as I know there was a lot of fraud involved, especially by big bourgeoisie. But it got me through during a period where no revenue came in but expenses still went out.
As loathsome as I find the Republican Party, the remaining political power of US federalism, while certainly demolished, does still produce a constituency of power from small and mid level businesses in mid sized cities. Hence, my business has benefited from the Trump tax cuts and PPP to the point where I am paying the lowest amount of federal taxes in my working career. Then having kids I have also received a large benefit (albeit temporary) from the Biden child tax credits.
I realize this is anecdotal and I certainly don’t mean to praise the the patchwork libertarian system of the US, but at least the results have managed to allow me to fight off the vultures of big bourgeoisie for the time being. I suspect other small businesses in the US would also feel a little lucky after reading this about the UK
And don’t forget, the ban on evil Russian diesel goes into effect on Feb 5. I know, EU countries have been loading up in anticipation of the moment so they should be ok for a week or two. Not sure what the storage capacity is in the UK.
The cube root of zero.
We’re talking UK capacity here, folks.
Contingency planning is still too damned close to socialism here…..
Jean-Paul Sartre pointed out in one of his essays in the early ’60s that the French bourgeoisie deliberately put into place policies which would enlarge the petit-bourgeosie so they would be a bulwark against the left. Similar social engineering to gut the working class and enlarge small business has taken place in the USA for years.
Now we have in Britain this blowback from imperial overreach – Brexit and the Ukraine war – which undoes this strategy. All I can say is “Well grubbed, old mole!”
Indeed I suspect u are right, this is what the Marxists would call “proletarianization”. Independent producers and others who own some means of production will always be progressively consumed by the intrinsic tendency of capitalism toward monopoly, unless the state does intervene to preserve and reinforce the means for a petty bourgeoise to stave off proletarianization at the hands of the big bourgeoisie.
Even here in Canada, we have the Canadian federation of independent business, a bourgeois group which uses small business as a cudgel against worker demands for paid sick leave, higher min wage etc.
It’s entirely appropriate that Great Britain, the first country to install neoliberalism as an economic operating system, should be suffering the malign effects
Following that logic, the US is next
Shit happens when you let the inmates run the asylum–“there’s no alternative”
Always useful to know, if cornered at the drinks table at EU type functions – apparently it was Bertrand Barère de Vieuzac not Napoleon who first described the UK as a ‘nation of shopkeepers’. Napoleon later hijacking it when beginning to make a name for himself.
Particularly his humourous quip, for an ex-Maghreb origin Corsican ….. “ in fact to assimilate you with the French.”
When Barrack Hussein Obama told the people that they didn’t build their houses and businesses and make them prosperous and that people didn’t acquire all that wealth by themselves, he must have been referring to all of the large corporations that made their money off of the few who actually work for a living. Much of the wealth that exists is just borrowed money on paper or in a computer. When I see a 19 year old girls driving a Porsche or a Mercedes, I know she didn’t work and save her money to do it. She borrowed it from a bank that created money out of thin air on a computer in order to put people into life long debt. And many of the jobs are token jobs that allow people to say they are employed without any real benefit to society, such as bureaucrats who assess and collect taxes from those who actually do work as they did in the old Soviet Union. It’s just one big Ponzi scheme with a few at the top collecting massive amounts of cash that they collected from others using shady collection tactics. When those at the top break the backs of those who actually work for a living, those at the top will be the first to jump off of buildings. Ok, well, a few might get tossed off of those buildings, but the result is the same. A rising tide raises all boats and a lowering tide lowers all boats in the end.