UK Economy Hits ‘Rock Bottom’ as Distress Bites Across Almost Every Sector and Region

Begbies Traynor’s Red Flag Alert, the UK’s leading quarterly benchmark of company distress shows a 24 per cent year on year increase of companies facing ‘critical’ levels of financial distress in Q4 2011, compared to Q4 2010.

The summary of the Q4 2011 statistics show;

• A 24 per cent year on year increase in instances of ‘critical’ financial distress across UK
• Many key sectors face significant rises in critical financial distress, including;

o        Automotive – 14 per cent increase
o        Construction – 13 per cent increase
o        General Retailing – 26 Per cent increase
o        Professional Services – 61 per cent increase
o        Property Services – 30 per cent increase
o        Travel & Tourism – 56 per cent increase

• The South East’s resilience to the recession is punctured with a 33 per cent year on year increase in ‘critical’ distress and 19 per cent rise in London
• Scotland shows increased critical financial distress, as the  public sector cuts now start to bite
• Travel and tourism sector distress climbs  by a  considerable 56 per cent year on year - Olympic “displacement” effect of London games likely to have serious consequences particularly on companies reliant on domestic tourism – we believe there will be at least one failure of a “household” name travel company during the next quarter
• Further deterioration within the beleaguered retail sector, with critical distress up 26% since Q4 2010 – with small/medium sized retailers particularly at risk

After a relatively soft period for business failure in 2011 compared with previous recessions, firms across key sectors now look set to face their toughest times so far as the UK economy looks likely to face increased business distress in the coming quarters.

Companies in regions that have so far seemed recession proof, such as the South East and London in particular, are now starting to face severe financial issues indicating that the UK may be progressing to a deeper stage of the recessionary cycle.

Although there have been a number of high profile national retail failures, the latest Red Flag Alert statistics highlights the real concern is for small and mid size regional retailers that appear to be suffering disproportionally.  Begbies Traynor anticipates considerable ongoing distress within this sector in 2012, particularly at a local level as retailers fight a losing battle for the public’s falling disposable income, particularly against the fierce price cutting of online retailers such as Amazon.

Ric Traynor, executive chairman of Begbies Traynor Group, said:

“Trends evident in the Red Flag Alert demonstrate that we are likely to be approaching a crucial period for businesses large and small. Escalating levels of distress indicate we may be  getting close to the bottom of the economic  cycle, where so called ‘zombie” businesses, which are inherently insolvent, but have benefited from extensive support measures such as HMRC’s ‘Time to Pay’ scheme eventually fail.

“The South East and London faced a year on year increase in ‘critical’ distress of 33 per cent and 19 per cent respectively. These figures certainly follow the typical cycle of recession; previous quarters showed growing numbers of ‘significant’ distress, but this is now crystallising into ‘critical’ levels – particularly within the automotive, construction, property, professional services and general retailing sectors.”

Julie Palmer, partner at Begbies Traynor, comments:

“The broad spread of distress reaches across just about every sector, but there are ‘hot spots’ such as the travel & tourism and professional services sectors.

“The travel and tourism industry was hit hard in 2011 and there appears no respite in sight.  The first quarter of the year, typically the travel/tourism sector’s main booking season, is a vital period when companies can take in much-needed deposits and this quarter is going to be particularly critical for many of them.”

“With household disposable income under so much pressure, and job security at an all time low we believe that booking volumes will fall and this in turn will result in some travel and tourism household name failures during the next quarter.

“Ironically, the London Olympics are likely to have a considerable negative impact on parts of UK tourism with some of the Capital’s West End theatres already having reported a 95% fall in bookings  for the period of the Olympics, suggesting that ‘displacement’ is already having a serious effect on not only the travel but also the leisure and culture industries.

“Regions traditionally associated with UK tourism such as the South West struggled considerably compared to a year ago experiencing a 32 per cent increase in ‘critical’ financial distress.”

Legal services shake up could impact further

Q4 2011 saw some non-legal businesses finalise plans to offer legal services in the run up to 3 January 2012, when applications for third parties to offer legal services could be officially received. But while the Legal Services Act presents opportunities for non-legal companies, most of the legal industry itself is floundering as a result of the knock-on effect on advisers as clients have sought to curb spending on legal services with pressure on fees strangling cash flow and putting firms under financial pressure. Legal businesses contributed to the bulk of a 61% increase in the number of professional services businesses facing ‘critical’ distress in Q4 2011.

Mr Traynor comments:

“The prolonged downturn in the legal sector and the change in ownership rules will change the face of the traditional partnership law firm for good and many will struggle to survive. Last year saw a significant consolidation within the UK’s mid-market firms, yet beneath this there is a layer of smaller high street firms that simply can’t compete with the economies of scale of the big household brands if they aggressively commoditise legal services at much lower prices.”