Brexit uncertainty sees business distress levels rise

The number of businesses judged to be in ‘significant’ distress now stands at 484,000, or 16% of all UK businesses, according to research by Begbies Traynor, which is warning of concerns that the UK could suffer a broader economic slowdown as Brexit uncertainty grows

The firm’s red flag alert data for Q1 2019, which monitors the financial health of UK companies, also found that the number of businesses in ‘critical’ distress, which is often a precursor to formal insolvency, rose by 17% year-on-year.

For the second quarter running the hardest hit sector was property, which saw a 13% year-on-year increase in the number of companies in significant financial distress rising to 48,182 (Q1 2019) from 42,512 (Q1 2018).

Within this sector, companies involved in buying, selling and letting took much of the hit with a 16% increase in significant distress to 36,018 (Q1 2019) compared to the same period last year - 30,947 (Q1 2018).

Begbies Traynor said construction, often considered the ‘bellweather’ of the UK economy, has also suffered. Compared to the same quarter last year there are now 10% more companies involved in the development of building projects in significant financial distress - 13,018 (Q1 2019), compared with 11,813 (Q1 2018).

The firm says this negative trend has also affected other construction sub sectors with a 5% increase in significant financial distress for those companies involved in the construction of commercial buildings. This trend is also replicated in companies involved in the construction of domestic buildings, where significant financial distress has also increased by 5%.

This latest research also reveals increasing levels of significant distress within the financial services sector, with 12,728 businesses affected, an increase of 5% compared to Q1 2018.

Begbies Traynor’s analysis suggests the sector has been particularly affected by the uncertainty surrounding Brexit with some activity stalling pending clarity on the final outcome. Once a final decision has been agreed, then stability should return as the fundamentals of this sector remain reasonably good.

Julie Palmer, partner at Begbies Traynor, said: ‘Many UK businesses are currently in limbo and deferring major investment decisions. This combined with consumers holding back on big ticket purchases has resulted in increasing significant distress across many sectors.

‘This trend is reflected in our latest red flag research which clearly shows that capital intensive sectors – such as construction and property – are suffering as both business and consumers have taken a cautious approach and limited their exposure. This is bad news for the economy as construction accounts for 17% of all UK businesses, employs almost 2.5m people and contributes 6% of the UK economic output.

‘Worryingly this data shows that this economic malaise is spreading to the UK’s dominant services sector and does need to be stopped in its tracks by a combination of political certainty and a commitment to support UK business, particularly SME’s which are the “engine room” of the UK economy.’

Pat Sweet

Pat Sweet |Reporter, Accountancy Daily [2010-2021]

Pat Sweet was the former online reporter at Accountancy Daily and contributor to the monthly Accountancy magazine, pub...

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