Business failures peak in sight but recovery will be two-speed says BDO LLP report

Date Friday 23 October 2009 Subject Business failures peak in sight but recovery will be two-speed says BDO LLP report Business failures peak in sight but recovery will be two-speed, says BDO LLP report Despite more than one in 60 businesses going bust this year, the rise in total business failures is set to end early in 2010 as the UK economy returns to growth and financial strain on businesses eases, according to the latest Industry Watch report by accountants and business advisors, BDO LLP. However, the report forecasts the road to recovery for businesses will be two-speed as fortunes will be split between the continued strain on consumer sector firms, and improving conditions for the manufacturing, real estate and business sectors. Chart 1: Total number of quarterly business failures by sector Conditions for the sectors hit hardest during the downturn such as manufacturers, real estate and construction companies as well as business services, have improved tangibly over the last few months. Indeed, the latest official statistics suggest that the recession for the manufacturing industry has officially ended with manufacturing output growth flat in August after increasing by 0.2 per cent in July, making it the first sector to emerge from downturn . The end of de-stocking, and indeed increasing inventories, will contribute to the rebound of the industry. Meanwhile, the main driver behind the rapid rise in business failures in construction and real estate was the housing market collapse, which in turn was triggered by the seizing up of capital markets. With a degree of normality returning to financial markets on the back of the considerable monetary and fiscal policy support, the effect of tighter lending should wear off gradually for construction firms and there should also be a tangible effect from increased government spending. Additionally, demand for business services should also start to recover soon. The PMI services index, a good early indicator, has risen and remained over the critical 50 points mark, which signals output growth. More consumer focussed sectors on the other hand, will continue to suffer even after the economy returns to growth. Although surprisingly resilient so far, consumer spending will decrease by 3.4 per cent in 2009, taking its toll from rising unemployment and lower wage growth, which will consequently drive up business failures in the leisure, personal services, as well as the retail and wholesale sector. Against this backdrop, the latest forecast suggests that combined business failures in these sectors will rise until autumn 2010. Andy Beckingham, Business Recovery Partner at BDO LLP Southampton commented: “The economic outlook is looking brighter amidst improved lending conditions and confidence in the markets. This is reflected in the report’s forecast for 2010 which predicts business failures to retreat slightly from the 2009 peak. However, the fall-out of the economic downturn will mean that looking ahead, we can expect business failures to remain on an elevated level in 2010 with 32,700 firms predicted to go under, as recovery will be sluggish, undermined by fiscal cutbacks.” ENDS For more information, please contact Gill Carson at BDO LLP on 020 7893 2761 or email gill.carson@bdo.co.uk Notes to editors: Methodology notes 1) Industry Watch is the first study to make projections of total business failures and the business failure rate in Great Britain by sector, based on data for compulsory liquidations, creditors voluntary liquidations, administrative receiverships, administrative orders and company voluntary arrangements (CVA) provided by the Department for Business, Enterprise & Regulatory Reform. 2) The BDO Industry Watch model uses 33 key variables which have shown to be related to business failures by sector. The total number of business failures for Great Britain is based on the aggregated sector forecasts. 3) Annual business failure rates are based on the number of VAT-registered enterprises and cebr have produced forecasts for the number of VAT-based enterprises expected in 2008 to 2012. Note to editors BDO LLP operates across the UK with some 3,000 partners and staff. BDO LLP is a UK limited liability partnership and a UK Member Firm of BDO International. BDO - Belfast, a separate partnership, operates under a licence agreement. BDO International is a world-wide network of public accounting firms, called BDO Member Firms. Each BDO Member Firm is an independent legal entity world-wide and no BDO Member Firm is responsible for the acts and omissions of another member. The network is coordinated by BDO Global Coordination B.V., incorporated in the Netherlands with its statutory seat in Eindhoven (trade register registration number 33205251) and with an office at Boulevard de la Woluwe 60, 1200 Brussels, Belgium, where the International Executive Office is located. The combined fee income of all the BDO Member Firms was $5.14 billion in 2008. The global network has 1,095 offices in 110 countries and more than 44,000 partners and staff provide business advisory services throughout the world. BDO LLP and BDO - Belfast are both separately authorised and regulated by the Financial Services Authority to conduct investment business. BDO is the brand name for the BDO International network and for each of the BDO Member Firms.