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Bank of England predicts supply impact as UK firms at risk of default to hit 50%

Bank Of England

The Bank of England (BoE) has released new analysis that suggests the share of non-financial UK companies experiencing debt-servicing stress will rise to 50 per cent by the end of the year.

If predictions are correct, this will be an increase from 45 per cent in 2022.

For medium-sized businesses with an annual turnover of between £10 million and £500 million, this will rise to 70%, meaning corporate debt stress will be at its highest level since the financial crash of 2008-2009.

The analysis blamed high interest and said it is responsible for “putting pressure on indebted corporates through higher debt servicing costs.” 

It added, “Such pressure increases the likelihood of defaults on corporates’ debt and may lead some firms to reduce investment and employment sharply.”

In the UK, the interest rate has risen from a record low of 0.1 per cent in November 2021 to where it currently stands at 5.25 per cent. The BoE analysis used market expectations that will see the rate rise to 6.1 per cent.

David Bharier, Head of Research at the British Chambers of Commerce, said the BoE’s analysis echoed what it had heard from many small and medium-sized businesses.

“Rising borrowing costs are putting significant pressure on many smaller businesses, who after three years of economic shocks are unable to absorb the increase.”

The Federation of Small Businesses has warned the BoE analysis fails to consider the impact that struggling small businesses have on the wider business ecosystem. 

Martin McTague, National Chair of the FSB, said, “The Bank’s analysis focuses on bigger firms and so doesn’t show the whole picture. Small businesses are far more exposed to rising interest rates than their medium-sized and large peers.

“The risk to medium-sized businesses should not be downplayed either, with rising costs still hitting hard.

“The insolvency of one company has a ripple effect on many others who are unable to recover money they’re owed, or who lose a key supplier or customer. Small and medium-sized businesses make up over 99% of all businesses in the UK, and the risks to them from rising interest rates are far from theoretical.”

The analysis comes as government figures show insolvency rates hit their highest levels since the second quarter of 2009 in the three months to June, with 6,342 firms registering for insolvency in England and Wales. This was 9% higher than the previous quarter.

Currently, UK construction firms are the most impacted and account for 18% of all insolvencies.

Wholesale and retail trade organisations were the next most-hit industry at 16%, followed by accommodation and food service activities (14%), administrative and support service activities (9%) and manufacturing (8%).

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