Green shoots of recovery in spite of GDP Gloom
Signs of recovery among Corporate UK bring talk of triple-dip into question
Improving fortunes of many industries a stark contrast to financial stress in consumer facing sectors
Latest Red Flag Alert Report for Q4 2012
Published on the back of gloomy GDP data, the most recent Begbies Traynor Red Flag Alert research, which monitors the financial health of “Corporate UK”, shows a 12% decrease in the level of ‘Combined’ distress across the UK (categorised as companies experiencing ‘Significant’ or ‘Critical’ financial problems) from 223,125 in Q3 2012 to 196,636 in Q4 2012, indicating the first tentative signs of recovery for parts of the economy. Our analysis has found that the key drivers of this decline were that:
Substantial decreases in distress in key sectors, construction and real estate, led the overall improvement but were in stark contrast to a rapid deterioration in the financial health of the consumer facing industries, indicating the emergence of a twin-track economy;
The number of HMRC petitions almost halved (down 43%) in Q4 2012 compared to Q4 2011 (and were down 25% on Q3 2012), bucking the trend for 2012 as a whole in which HMRC petitions were up 23%; and
A reduction in the number and total value of CCJ’s issued. However more businesses are now moving into insolvency procedures after fewer CCJs are accrued, reducing the numbers recorded by our Red Flag Alert figures but indicating that the fragile position of those companies that are struggling is increasingly evident.
Construction and Real Estate leading the fast lane
A number of sectors have shown substantial improvements during the final quarter with the largest sectors by number of businesses, namely construction and real estate, among those showing the biggest decline in ‘Combined’ distress levels. Construction reduced by 7,899 cases or 34% (23,190 in Q3 2012 to 15,291 in Q4 2012), whilst real estate reduced by an enormous 20,616 cases or 57% (35,959 in Q3 2012 to 15,343 in Q4 2012).
While much smaller in terms of the volume of businesses, the most significant improvements among other sectors were seen in industrial transportation and logistics, with a 41% decrease in distress from 4,160 in Q3 2012 to 2,457 in Q4 2012, and printing and packaging, with a 35% decrease from 1,228 in Q3 2012 to 800 in Q4 2012.
Julie Palmer, Partner of Begbies Traynor, commented:
“Our Red Flag figures demonstrate an improvement in the financial health of the construction sector, which we believe reflects the fact that those construction firms that have survived the crisis are now benefitting from improving margins on a lower cost base. It is also evident that some construction firms have purchased land banks at substantially discounted prices following the financial crisis which, combined with a material improvement in the sector’s output towards the end of 2012*, are encouraging signs. In addition large infrastructure projects such as the construction of HS2 rail link should have a considerable positive impact on the sector in the medium to long term while, in the nearer term, the sector is benefitting from decreased competition since the onset of the crisis and continued creditor forbearance, with our analysis showing increased liabilities across the sector.
“In the real estate industry, a substantial surge in buy to let activity during 2012 (with buy to let mortgages reported to be up approximately 20% on 2011**) has driven a clear revival in the financial health of property management businesses, which account for a high proportion of this sector.
Julie Palmer added: “The overall improvement in the construction and real estate sectors may also reflect an easing in the mortgage market, which has been much lauded as the main beneficiary of the Funding for Lending scheme, launched in August 2012. Although these sectors are typically the first to be hit in a recessionary environment, they are also usually the first to come out the other side, so this positive development could be a predictor of a slowly improving UK economy overall.”
Julie Palmer continued: “Among the good news across other sectors, it is encouraging to see significant improvements in the industrial transportation and logistics industry as well as the printing and packaging sectors, where a shake out of the weakest companies has benefitted the most efficient businesses that remain. Our analysis shows that a greater proportion of businesses in these sectors are reporting improving profitability as a result, with increased utilisation of their relatively high fixed cost bases being driven by the pre-Christmas growth in internet retail sales and flowing quickly through to their bottom line.”
Consumer facing sectors in the slow lane
However, a clear deterioration in the financial health of most consumer facing sectors offers a stark contrast to the improvements across many sectors, indicating the emergence of a twin track economy. Leading the increases in ‘Combined’ financial distress in the fourth quarter of 2012, compared to the third quarter of 2012, was the bars and restaurants sector with a 48% increase (from 7,839 to 11,600), followed by general retailing which was up 34% (from 8,625 to 11,541), food retailing which increased by 30% (from 1,943 to 2,525), leisure (up 30% from 3,924 to 5,092), media (up 25% from 5,470 to 6,864) and sport and recreation (up 20% from 3,108 to 3,730).
Julie Palmer commented: “The substantial increases in financial distress in these key consumer-facing sectors demonstrate the sheer scale of the challenges facing the consumer economy, particularly as these rises come at a time when spending in the run up to Christmas should have provided a welcome boost to many of these businesses. It is clear that these businesses are feeling the effects of the constraints on discretionary consumer spending brought about by years of wage rises not keeping pace with the rate of inflation and households reducing debt, where possible. Unfortunately, this year will offer no respite for family budgets as changes to the child benefit allowance, rising utility bills, travel fares and other costs, and continued weak growth in real pay rates can only be expected to drain more cash away from these sectors.”
Ric Traynor, Executive Chairman of Begbies Traynor Group, concluded: “The 12% decrease in the level of distress across the UK is a welcome sign that some parts of the economy are moving back towards improved financial health, supported by continued low interest rates, a reduction in actions taken by creditors and their increased forbearance. However, the situation remains fragile, with a large population of companies still struggling to survive, let alone face the working capital funding challenges of a recovery. As such we would expect to see the usual annual peak in insolvencies in March.”
View the full Red Flag Alert Q4 2012 Report
* Source: According to ONS statistics, construction output in Great Britain (at constant 2005 prices, non seasonally adjusted) grew by 1.8% to £25.2bn for the three months to November 2012 from £24.8bn in the three months to August 2012
** Source: Council of Mortgage Lenders reported, in November 2012, that “the value of buy-to-let lending in the first nine months of 2012 amounted to £11.8 billion, 19% higher than the £9.9 billion advanced over the same period in 2011”
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.