Tough times ahead as insolvencies start to spike

A sharp increase in insolvencies during 2023 should start to ease slightly during 2024

Global insolvencies increased by 9% during 2022. Much of these occurred when governments removed the fiscal support packages that had been put in place to support businesses during the pandemic lockdowns. This year, however, we predict an even bigger surge, with an increase in global insolvencies of as much as 49% compared to the previous year.

So, what is happening, and which economies will be worst hit over the next two years? Senior Atradius Economist, Theo Smid, explored these questions and more in this quarter’s Atradius Economic Research Insolvency Forecast report. He found that some of the world’s major economies will face a significant increase in business failures this year including; South Korea (154%), Italy (90%), Hong Kong (83%), New Zealand (82%), the Netherlands (79%) and the United States (74%).

Are insolvencies just a sign of a return to normality?

The year-on-year increases in insolvency levels might seem shocking on the face of it. However, it is actually a rapid rise we had been expecting, as with the removal of fiscal packages insolvencies are likely to move back to pre-pandemic levels. On top of this normalisation, there are also weaker businesses that had been propped up by fiscal packages during the pandemic lockdowns, but are not able to survive the removal of support. Many will be companies that would have gone bust in normal conditions but were given a few extra months of life with government support. Some of the insolvencies will represent zombie companies that have been entirely supported by government interventions and are, in effect, already dead. Some will be businesses that have not been able to negotiate the current challenging economic environment.

In some markets, insolvencies have already returned to their pre-pandemic levels. However, in the majority of countries, insolvencies are still in the process of adjusting. In Belgium, the normalisation of insolvencies started in 2022 and is continuing in 2023. In Italy, the adjustment is very much taking place in 2023, leading to a deteriorating trend. However, the rise in insolvencies cannot only be attributed to the return to normality.

The sharp increase in the numbers of business failures will start to lessen during 2024 and we predict an increase of 12% compared to 2023.

Is subdued growth impacting insolvency levels?

The global economy is forecast to grow by just 1.7% in 2023. Stubbornly high inflation and tightened monetary policies, along with suppressed demand, are creating difficult trading conditions in many markets.

Last year’s increase in insolvencies were concentrated mainly in economies that had removed support early or were grappling with additional financial challenges. In the UK, for example, the rise of insolvencies can be attributed to ending of government support measures combined with the weak economic recovery since Brexit. In Spain, the economic slowdown and the lifting of the moratorium on bankruptcy filings triggered a spike the insolvency level in Q3 of 2022.

Looking ahead to 2024

2024 is currently looking like it will be a mixed picture. Globally, we expect to see improvement with the proportion of insolvencies rising by 12% compared to 2023. In New Zealand, South Korea and Singapore, the rate is likely to be higher, as the process of normalisation will still be continuing for them.

However, in other markets business failures will start to decline or will keep to a fairly constant level. This will be due to a return to normal insolvency rates and the fact that zombie businesses that are not able to survive without support, will have gone bankrupt already.

The future will remain challenging, however. Companies that took on a lot of debt in the pandemic years may find ongoing monetary tightening puts added pressure on their cash flows. This, in turn, may prove to add to the heightened insolvency risk. So while the future does look brighter, in terms of insolvency risk at least, the global economy is not yet out of the woods.

Download the Atradius Insolvency Report report here