24 Aug 2020
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We are heading into one of the deepest recessions in history, but bankruptcy figures seem to tell a different story. The figures released by the Insolvency Service show that there were far fewer bankruptcies in May of this year when compared to the same month in 2019. In the weeks running up to lockdown (between the 1st and 23rd of March), 76 people per working day on average were going bankrupt. In the week immediately after the lockdown started, the average number of daily bankruptcies fell to 45. There were 739 bankruptcies in total in May, down a massive 49% compared with the same month last year.
The number of debt relief orders (DROs), another form of personal insolvency, was also down by nearly a third (32%) compared with May 2019. Just prior to lockdown, there were typically 119 DROs per day and in the days immediately after it, the number fell to 65.
The coronavirus pandemic has thrown the world into turmoil and the UK economy has suffered a massive knock, yet more businesses are managing to stay afloat, why is this? Reduced operations in courts is likely to be a factor in the fall in bankruptcies but the main driver behind the statistics is government intervention with furloughing policies and guaranteed loan schemes designed to assist companies through this difficult period. The government has also pumped liquidity into the system, and interest rates have been cut, practically to zero.
As of mid-June, businesses had borrowed £10.1bn through the coronavirus business interruption loan scheme, which is 80% guaranteed by the government. Others had borrowed £1.7bn through the coronavirus large business interruption loan scheme, which is also 80% guaranteed by the government. Smaller firms have raised £23.7bn through the Bounce Back loan scheme, which is 100% guaranteed by the state. Firms have separately raised tens of billions using the Bank of England’s Covid Corporate Financing Facility, which is also state backed. All this is keeping businesses afloat during the pandemic, but some companies will be saddled with huge debts which they will struggle to repay in the future.
Through the natural cycle, some companies that don’t have a successful business model go bust and the more agile, robust, quality firms pick up their business, creating a healthy and thriving network. Right now, the natural cycle has been interrupted by government intervention. Some companies that may have gone into liquidation without the coronavirus pandemic are limping along because of government assistance. There are fewer insolvencies, but this is not necessarily a positive sign or an indicator of what’s to come.
Whether you’re a company or an individual, if you’re able to change your behaviour or business model right now, you may come through this highly unstable time. Compared to pre-lockdown and despite the impact of the pandemic on people’s wages, Brits were holding on average 11% more money in their accounts at the end of May. Data from the Halifax has found that the build-up of balances coincided with a significant fall in outgoings since lockdown was introduced. In May alone, spending on essentials and non-essentials fell 3% and 32% year-on-year, and much of that has been retained by customers. It goes without saying that many people have had their income substantially impacted by the pandemic, but the average current account balance is now higher than pre-pandemic levels.
We are potentially in the period of calm before the storm, a shocking 20.4% fall in GDP in April would suggest that we’re set for a period of economic turbulence and an increase in insolvencies is on its way.
Research also shows that consumer spending and confidence, which are indications of both the health of the nation’s personal finances and of how businesses will fare going forward, fell significantly between March and April, and many businesses will face a rocky road until this improves. The longer lockdown continues, the more damage the economy will sustain yet easing restrictions on trading prematurely could lead to a wave of new infections and an even greater danger to business and personal finances. The Government has a difficult job in balancing these considerations as it plots a path forward.
Individuals and businesses are facing tough times right now but those who manage to adapt have every chance of making it through to the other side, and they’ll be stronger for it. There will no doubt be an increase in insolvencies as the year progresses, but we will also end up with a pool of resilient and versatile businesses which will bring back confidence in consumer spending and propel the economy forward once again.
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