Despite forecasts for solid economic growth, insolvencies in the UK are expected to climb by 11% in 2005 – and individuals and sole traders are expected to be the ones most at risk.
According to credit insurers Euler Hermes the increase will mean the UK will have one of the highest insolvency rates in the EU – ahead of Germany, France the Netherlands and Spain among others.
But Philippe Brossard, Euler Hermes chief economist, explained that sole trader and individual insolvencies, the main drivers behind the high insolvency rate for 2005, were not included in the figures of other countries.
‘The high rate of insolvencies in the UK is mainly a result of individual insolvencies having been included in statistics. In other countries individual insolvencies are not included,’ Brossard said.
Because of the individual insolvency factor, the UK had to record higher GDP growth than other EU countries to compensate.
With growth expected to slow, individual insolvencies should boom in the forthcoming year and an increase of 18% is expected.
Brossard said that UK GDP for 2004 should hit 3.1% once fourth quarter figures are in, but warned that in 2005 higher interest rates are expected to slow growth down to 2.3%, which would bring about a spike in insolvency numbers from 54,900 in 2004 to 61,200 in 2005.
‘Individuals are more vulnerable to swings in GDP than bigger companies. For insolvencies in the UK to stabilise’, Brossard said, ‘there needs to be a 2.9% growth in GDP.’
It is not all doom and gloom, however, and the good news for the UK is that insolvencies of bigger concerns are on a significant downturn, even though individual insolvencies are on the up.
Euler Hermes is forecasting a 11% drop in UK company insolvencies.
‘Growth in the UK has outperformed the EU, and although it has not been strong enough to benefit individuals, there has been enough growth to bring company insolvencies in the UK down,’ Brossard said.
On the global front, Euler Hermes is forecasting a downturn in world GDP from 4% to 2.9%, which would increase insolvencies.
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