Begbies Red Flag Report warns of "critical" distress in economy

The number of UK Business considered to be in critical financial distress has risen by 25 per cent from Q2 to Q3.

This is according to the Begbies Traynor Red Flag alert report. The situation was most dire for the service trade, leisure and cultural firms and media, which recorded quarter on quarter rises of 48 per cent, 72 per cent and 48 per cent respectively.

All 22 sectors appraised, recorded a rise in firms considered to be in critical financial distress; amounting to 610,000 UK firms in total.

Begbies, who are based in Southampton, define "Critical financial distress" as, when businesses have minor CCJs in excess of £5000 filed against them.

Julie Palmer, partner at Begbies Traynor, said the growing number of companies in critical financial distress was of particular concern: "We are now in an environment that we have not seen for many years, with a dangerous mix of rapidly rising inflation, escalating interest rates and crumbling consumer confidence.

"The economy, which had already been weakened by two years of pandemic disruption, now faces the very real possibility of a recession at a time when businesses were in desperate need of a sustained period of stability.

"What we have instead is a situation where input costs are soaring and businesses that borrowed to survive for years and are stuck with levels of debt that they may be unable repay - especially with interest rates expected to rise to circa 6% in 2023. 

"The economic turmoil is also having a stark effect on consumer confidence, and I remain particularly concerned about sectors most exposed to discretionary consumer spending, namely Bars & Restaurants, Leisure, and General Retailers.

"These businesses were some of the worst affected by pandemic chaos and now their customers are reining in discretionary spending, something we can clearly see in this Red Flag data."

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Mrs Palmer added: "After several years of volatility, the directors of businesses up and down the country are now facing very difficult decisions. They must decide whether to soldier on or give in, as they realise their businesses may not be viable if interest rates continue to rise as many economists expect.

"For the time being, many will continue to resist but interest rates will continue to rise, energy costs will remain stubbornly high, despite the Government's intervention, and consumers are reining in spending, so the future is far from bright when we look into 2023.

"I fear that many directors who fought through Covid will soon conclude that getting through 2023 and 2024 is a bridge too far after the troublesome period they have just battled through."

Worryingly Executive Chairman of Begbies Traynor, Ric Traynor, commented: "Unfortunately, things are only likely to get worse."

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