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Begbies Traynor Red Flag Alert indicates UK will narrowly avoid a triple dip recession

Julie Palmer

Business Health Statistics

| April 24th 2013

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Begbies Traynor Red Flag Alert indicates UK will narrowly avoid a triple dip recession

Ahead of the release of the latest GDP figures this week, the most recent Begbies Traynor Red Flag Alert research for Q1 2013, which monitors the financial health of “Corporate UK”, shows that the recovery of UK plc continues, with a 34% decline in ‘Critical’ financial distress among UK businesses compared to Q1 2012.

Across all sectors, UK businesses experiencing ‘Critical’ financial problems reduced from 5000 in Q1 2012 to 3283 in Q1 2013, indicating that the UK economy has turned a corner. However this positive picture, led predominantly by improvements in the UK’s vital business services sector, masks a patchy recovery with sectors reliant on the consumer economy (general retail, leisure and media) as well as real estate, witnessing an increase in financial distress for the period.

Julie Palmer, Partner at Begbies Traynor, commented: “The year on year improvement reflects the continued forbearance and benign monetary conditions facing UK businesses today, combined with an improving credit environment, albeit primarily for larger corporates. Business confidence is slowly returning in the form of greater business spending on both services and investment.”

When comparing the data on a quarterly basis, it reveals an 8% increase in ‘Critical’ financial distress from 3,044 in Q4 2012. This increase could largely be attributable to seasonal factors such as the propensity for creditors and directors to take action ahead of having to file accounts for the new tax year. However certain consumer-facing sectors, including leisure (up 81%), hotels (up 63%) and general retail (up 27%) have been impacted by the unseasonably cold weather experienced throughout the first quarter of 2013.

Lack of funding still a significant issue for UK SMEs
Meanwhile the ongoing lack of funding to support the important SME sector is a growing concern. Begbies Traynor’s analysis of new lending to business across its Red Flag Alert database, which is predominantly SMEs, found that the number of companies that secured new funding, at 15,804 in Q1 2013, was down 14.5% from 18,943 companies in Q1 2012 and down 11% from 17,823 in Q4 2012.

Julie Palmer added: “The underlying trend is arguably one of an improving picture. However, given the slight increase in distress compared to the previous quarter, it remains to be seen if we are out of the woods yet. With business rate increases planned in April, HMRC’s new PAYE Real Time Information requirements coming into effect, and further minimum wage rises ahead there are still significant headwinds for the UK SME sector, which is typically less able to bear the burden of these changes than their larger counterparts.”

Business services leading the recovery
Leading the recovery with significant reductions in ‘Critical’ financial distress during the period are the Support Services and Professional Services sectors, which, decreased by 78% to 169 cases (Q1 2012: 760) and 63% to 66 cases (Q1 2012: 176), respectively year on year, or by 7% from 181 in Q4 2012 and 14% from 77 in Q4 2012 respectively.

These findings are consistent with the latest Services PMI data for March 2013, which found that the UK Services sector recorded its best growth in seven months on the back of increased business confidence, with new business volumes at their highest levels since May 2012.

Julie Palmer commented: “Thanks to improving business confidence, increasing demand for advisory services and a revival of transactions, the support and professional services sectors are gaining momentum. The situation has certainly been helped by the fact that many of these businesses have reduced their cost bases significantly during the downturn such that any uptick in activity quickly improves their bottom line.

“This trend may also be a positive sign of what to expect from the GDP figures later this week, as the significant improvement in the UK Services sector could well push an otherwise flat market into growth territory, narrowly avoiding an unprecedented triple dip recession.”

Patchy consumer economy
Unseasonal weather and changing consumer habits have led to further struggles within many consumer facing sectors, with retail and leisure being among the worst losers this quarter. Companies experiencing ‘Critical’ financial distress in general retailing were up 24% (168 cases in Q1 2013 from 137 the equivalent quarter last year) while ‘Critical’ distress levels in the leisure sector increased 12% from 34 to 38 cases over the same period.

Conversely the bars and restaurants sector has improved the most amongst the consumer-facing sectors, with a decrease in ‘Critical’ financial distress of 10% to 135 cases compared to Q4 2012, and decreasing 66% when compared to Q1 2012.

Julie Palmer commented: “While most of the consumer-facing industries are still losing ground, blaming an extended winter on lower footfall and constrained sales of spring season goods, the bars and restaurants sector appears to be winning the race as consumers have switched to indoor spending closer to home rather than venturing out to more traditional visitor attractions.

“However, as a sector, bars and restaurants are certainly not out of the woods yet. Having already seen a considerable contraction in the number of operators following high rates of closure new Begbies Traynor analysis shows that businesses in the sector remain 2.5 times more likely to have adverse creditor actions against then than the average for companies across all sectors, inferring the fragility of this group.”

Credit conditions a boost to construction while increasing arrears hold back real estate
According to the Red Flag Alert data, in Q1 2013 construction businesses experienced a 48% reduction in ‘Critical’ financial distress to 630 from 1,212 cases in Q1 2012. This positive trend is in stark contrast to the real estate sector, which during the equivalent period saw financial distress levels rise 24% to 227 cases nationwide (Q1 2012: 183).

Julie Palmer added: “Greater Government support for the housebuilding sector and first-time buyers, combined with improving credit conditions from the banks, is helping to improve the fortunes of the construction industry.

“However for the property management companies, lettings agents and landlords who fuel the real estate sector, recent reports of higher repossession rates2 and increased levels of tenants in severe arrears3 indicate that these businesses are now facing the consequences of the continued pressures on household finances .”

Ric Traynor, Executive Chairman of Begbies Traynor Group, concluded: “The 34% fall in critical distress levels across the UK is another welcome sign ahead of this week’s GDP announcement and indicates that the economy may have finally turned a corner, even if only to historically low levels of growth.

“The return to strength of the UK’s important business services sector is particularly encouraging for the whole economy but the ongoing lack of funding to the SME sector, which is a fundamental driver of the economy, remains the greatest obstacle to a stronger and sustained recovery.”

Critical problems:

Sector Q1
2012
Q1
2013
%
Change
Q4
2012
Q1
2013
%
Change
Automotive 143 91 -36% 95 91 -4%
Bars & Restaurants 396 135 -66% 150 135 -10%
Construction 1,212 630 -48% 571 630 10%
Financial Services 90 84 -7% 75 84 12%
Food & Bev Mfr
Beverage Mrfg
29 22 -24% 14 22 57%
Food Retailing 90 43 -52% 42 43 2%
General Retail 137 168 23% 132 168 27%
Hotels 65 31 -52% 19 31 63%
Ind Transport & Logistics 76 67 -12% 61 67 10%
Leisure 34 38 12% 21 38 81%
Media 52 67 29% 44 67 52%
Other Mfrg 291 208 -29% 206 208 1%
Others 694 122 -82% 109 122 12%
Printing & Packaging 29 24 -17% 20 24 20%
Professional Services 176 66 -63% 77 66 -14%
Real Estate 183 227 24% 207 227 10%
Spors & Recreation 47 34 -28% 32 34 6%
Support Services 760 169 -78% 181 169 -7%
Telecoms & IT 203 110 -46% 95 110 16%
Travel & Tourism 44 44 0% 47 44 -6%
Uncoded 9 785 8622% 730 785 8%
Utilities 15 4 -73% 5 4 -20%
Wholesaling 225 114 -49% 111 114 3%
All Sectors 5,000 3,283 -34% 3,044 3,283 8%
Julie Palmer

About the author

Julie Palmer

Regional Managing Partner

Meet our Team of Experts

Julie is a law graduate who qualified with Price Waterhouse in 1994. Julie joined Smith & Williamson in 1997 and became a partner in 2001. With Mike Stevenson, Julie set up Middleton Partners offices in Salisbury and Southampton, both of which are now part of Begbies Traynor.

Julie is a member of the Insolvency Practitioners Association and the None Administrative Receivers Association and is a Fellow of The Association of Business Recovery Professionals. Julie deals with all aspects of Corporate Recovery and turnaround work and takes all form of personal insolvency appointments.

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Insolvency Practitioners Association Institute of Chartered Accountants in England and Wales R3: Association of Business Recovery Professionals ICAEW Business Advice Service Turnaround Management Association ACCA (the Association of Chartered Certified Accountants) ICAS | The Institute of Chartered Accountants of Scotland
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