Business insolvencies witness sharp climb – Allianz Trade

Global insolvency rates are expected to rise significantly by +6% in 2023.

After a modest rebound in 2022 (+1%), global insolvency rates are expected to rise significantly by +6% in 2023 and +10% in 2024, reported Allianz Trade.

Allianz Trade has unveiled its latest Global Insolvency Report today, which indicated several factors are driving this acceleration. 

The corporate sector is grappling with a recession in revenues, largely influenced by diminished pricing power and weaker global demand. 

Notably, as of the second quarter (Q2) 2023, this revenue recession has become widespread across all regions, marking the first time since mid-2020 (-1.9% year-on-year). Coupled with persistent high costs, this situation is eroding profitability and liquidity positions, with little improvement anticipated before 2025.

Hospitality, transportation, and wholesale/retail are on the front lines of this crisis, while other industries, such as construction, are catching up rapidly. Construction, particularly in the residential segment, is facing the completion of backlogged work.

By the end of 2023, the majority of advanced economies will have normalised their business insolvency rates, with 55% of countries witnessing significant double-digit increases. 

This includes countries like the U.S. (+47%), France (+36%), the Netherlands (+59%), Japan (+35%), and South Korea (+41%). Globally, three out of five countries are expected to return to pre-pandemic business insolvency levels by the end of 2024, encompassing major markets like the U.S. and Germany.

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Stabilising insolvency figures would require a doubling of GDP growth on both sides of the Atlantic, a scenario unlikely to occur before 2025. This report highlights the challenges faced by businesses and economies as they navigate the ongoing economic uncertainties.

Alarming third quarter

As of mid-October, the year-to-date data indicates a concerning upward trend in insolvency rates in three out of four countries. What's even more alarming is that many of these countries are experiencing double-digit rebounds in insolvencies. 

Specifically, 11 nations, which collectively contribute 40% to the global GDP, have seen insolvencies surge by more than +30%. These countries include the United States and Canada in the Americas, the Netherlands, Sweden, and France in Western Europe, Poland and Hungary in Eastern Europe, and Japan, Australia, New Zealand, and South Korea in Asia.

The index suggests another increase in Q3 2023, marking the sixth consecutive quarter of positive year-on-year growth. Allianz Trade anticipates the Global Insolvency Index to increase by a range of +15% to +20% year-on-year, following a trend of +18% in Q2, +15% in Q1, and +10% in Q4 2022.

This rising trend was anticipated and can be attributed to several factors, including the post-COVID-19 normalisation process, weakened global demand, and sustained pressure on profitability due to higher input and financing costs. 

These factors are particularly impacting small and medium-sized enterprises (SMEs). These insights underscore the complex challenges businesses and economies face as they navigate the evolving economic landscape.