Rise in Insolvencies

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Despite the apparent good health of the labour market, UK business insolvencies are on the rise. In October 2021, they reached their highest point yet, with more than 1,446 closing their doors, up from 1,349 in August, and more than 56 percent higher than the same period last year. Furthermore, as fiscal support begins to wane, insolvencies are expected to rise by another 33 percent over the next twelve months. 

Analysts expected Delta variant to slow recovery

Despite widespread vaccination efforts, protection against the Delta variant of SARS-CoV-2 isn’t perfect. Many people are still getting sick and dying from COVID-19. Given this situation, many analysts believed that governments would continue to impose restrictions on business next year, preventing businesses in many sectors from operating as usual. Even in areas of the world with high vaccination rates, such as the US and Europe, the political and public health response looked bleak.

The impact of Omicron

Now with omicron on the way, it appears as though the situation will change again. At this stage, it seems unlikely that the government will need to impose new restrictions to protect public health. This variant appears more transmissible and much milder than either alpha or delta, reducing the risk of hospitalisations. It could even herald the return to business-as-usual. 

The hangover from COVID-19 lockdowns

In the UK, though, since “freedom day” – 19 July 2021 – most businesses have been able to operate without restrictions, but the economy is now going through a severe hangover. Even though the future appears to look bright from a public health perspective, companies are still having to deal with the aftermath of the COVID-19 lockdowns. 

For instance, rising energy prices resulting from supply fluctuations are putting upward pressure on costs. Firms are having to pass on the price rises they face to other companies downstream and, of course, consumers. 

Transport costs and supply issues are creating additional pressures, according to industry experts, both of which are likely to result in further failures in the future. 

Debt is also a major concern. The Bank of England believes that around a third of firms are highly indebted (at more than 10 percent of their cash balances). If inflation takes off and governor Andrew Bailey needs to raise rates, he may, putting them in serious jeopardy next year. 

Government response

The government, though, says that it isn’t idly standing by and allowing firms to fail. HM Treasury recently confirmed that it was preparing more than £400 billion in support via its Plan for Jobs scheme. There will also be a “super deduction” earmarked for corporate recovery, which the treasury believes will unlock around £20 billion of additional investment. 

At present, it seems likely that COVID-19 will continue to push business failures higher. However, this “weeding out” will likely come to an end soon as supply and demand normalise. Many government economists believe that currently inflation is temporary, dampening concerns that interest rates will need to rise next year.

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