There are now 484,000 UK businesses in significant financial distress, with the property sector particularly affected, giving rise to concerns that the UK could suffer a broader economic slowdown.
Red Flag Alert Q1 2019 data, which monitors the financial health of UK companies, found that 14% of all UK businesses were experiencing significant financial distress at the end of March 2019, whilst the number of businesses in critical distress compared to the same period in 2018 was a whopping 17%.
The property sector 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 were particularly affected with a 16% increase in significant distress to 36,018 (Q1 2019) compared to the same period last year - 30,947 (Q1 2018).
Construction 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) vs 11,813 (Q1 2018).
This trend has also affected construction sub sectors with a 5% increase in significant financial distress for companies involved in the construction of commercial buildings - 2,451 (Q1 2019) vs 2,328 (Q1 2018). Companies involved in the construction of domestic buildings have seen companies in significant financial distress increase by 5%, to 6,209 (Q1 2019) from 5,919 (Q1 2018).
The financial services sector has also been hit, with 12,728 businesses affected - an increase of 5% compared to Q1 2018. Brexit has proved challenging for this sector but once a final outcome has been agreed, stability should return as the fundamentals of this sector remain reasonably good.
The Hotels & Accommodation sector has seen a 9% year-on-year increase in businesses experiencing significant financial distress, for the Leisure & Cultural sector the increase is 4%.
Both sectors rely heavily on migrant workers and with net EU migration to the UK falling to its lowest level since 2009, these businesses have to operate with a reduced labour supply and increasing costs due to the recent 5% increase in the national living wage.
Mark Halstead, Partner at Red Flag Alert, said:
“Many UK businesses are waiting for the outcome of Brexit negotiation before making strategic investment decisions. This combined with a slowdown in consumer spending on big tickets items has led to the increase in financial distress.
This trend is reflected in our latest Red Flag Alert research which shows that capital intensive sectors – such as construction and property – are suffering as both business and consumers are taking a cautious approach to spending.
If construction struggles this can have a significant impact on the economy - 17% of all UK businesses are in the construction sector, it employs almost 2.5m people and contributes 6% of the UK economic output.
“Worryingly the Red Flag Alert data shows that this economic malaise is spreading to the UK’s services sector. The government urgently needs to address this difficult environment. It needs to create an environment of political certainty and a commitment to support UK business, particularly SMEs which are the “engine room” of the UK economy.”
Ric Traynor, Executive Chairman of Begbies Traynor Group plc, commented:
“We have heard from businesses that Brexit uncertainty has been a hindrance to business growth and investment. There has already been a number of high-profile firms announcing their decision to invest in other countries, which not only impacts regional economies, but also the SME supply chain.
Brexit uncertainty has undoubtedly reduced business growth and investment. A number of large firms have already announced decisions to invest in other countries – bad news for regional economics and the whole SME supply chain.”
Red Flag Alert has been measuring and reporting corporate financial distress since 2004, and over that time has become an industry benchmark of the underlying health of companies across every sector and region of the UK.
Through its unique financial health algorithm, Red Flag Alert measures corporate distress signals, drawing on data from ten market leading data owners from a wide range of relevant sources, including intelligence from the UK’s leading insolvency business, Begbies Traynor. Using its algorithm Red Flag Alert provides detailed financial health ratings for every UK business. These ratings are updated in real-time as new information becomes available; currently there are over 100,000 data changes every single day.
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The release refers to the numbers of companies experiencing ‘Significant’ problems, which are those with minor CCJs (of less than £5k) filed against them or which have been identified by Red Flag’s proprietary credit risk scoring system which screens companies for a sustained or marked deterioration in key financial ratios and indicators including those measuring working capital, contingent liabilities, retained profits and net worth.