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There will likely be an uptick in the number of insolvencies this year, which could prove a headache for insurance investment teams. Report show companies are failing at higher numbers after an enforced lull during the pandemic years, which could affect the wider economy, and portfolios.
According to the annual report from Allianz Trade, “Insolvency Report No rest for the leveraged” there will be a rebound in business insolvencies, which are picking up speed but will vary greatly between countries.
“Half of the countries we analysed are likely to exceed their pre-pandemic
levels of insolvencies in 2023, and three out of five in 2024.”
The insurer’s “Global Insolvency Index” was set to see a jump of 21% in insolvencies by 2023 and 4% in 2024.
“Half of the countries we analysed are likely to exceed their pre-pandemic levels of insolvencies in 2023, and three out of five in 2024,” said the report. “In Europe, we expect insolvencies to reach 59,000 cases in France in 2023 (+41% year-on-year), 28,500 cases in the UK (+16%), 17,800 cases in Germany (+22%) and 8,900 cases in Italy (+24%).”
In the US, there was a sharp increase of 49% expected in 2023, which the report said was a result of tighter credit conditions and a sharp economic slowdown.
“[This] will mean a return to 20,000+ insolvencies per year,” it said.
Conversely, in China, there will likely be a moderate increase in insolvencies of 4% as the construction sector is still ailing.
Many analysts say that China has a good chance of stabilising its economy this year. However, macroeconomic headwinds such as fallout from Covid-19, a conservative fiscal policy, global inflation, and the impact of deglobalisation and nearshoring around the world have taken their toll on the world’s second largest economy.
But the Chinese government have said its economy is recovering. Though, this rhetoric has been at odds with some of the granular detail emerging from the country.
The current malaise in growth that has spread across much of the developed economies could also increase insolvencies as countries try alleviating this stagnancy via economic stimulus, which could raise prices.
"The Eurozone and the US would need 1.3pp and 1.5pp of additional GDP
growth on average in 2023-2024 to stabilise the number of insolvencies."
Year-on-year inflation in the OECD - as measured by the Consumer Price Index (CPI) - fell to 8.8% in February 2023, down from 9.2% in January. Declines in inflation between January and February 2023 were recorded in 23 of the 38 OECD countries.
The balance between growth and inflation will also have an effect. “Lower growth in 2023 and 2024 will have its toll. We calculate that the Eurozone and the US would need 1.3pp and 1.5pp of additional GDP growth on average in 2023-2024 to stabilise the number of insolvencies,” said Allianz’s report. “The current muddle through environment is the main reason behind our forecast.”
It pointed to constriction and retail as the most affected.
The varying state of play for economies could be challenged by this trend in different ways. The UK GDP was flat in the three months to January 2023, according to the Office of National Statistics.
“The services sector grew by 0.5% in January 2023, after falling by 0.8% in December 2022, with the largest contributions to growth in January 2023 coming from education, transport and storage, human health activities, and arts, entertainment and recreation activities, all of which have rebounded after falls in December 2022,” it said.
However, according to an International Monetary Fund report from February, The European Commission believes the EU's economic growth is likely to be stronger than expected this year.
It added that it believed economic activity will not contract in the first quarter of this year, meaning the 27-member bloc will avoid a previously expected recession.
The Commission added that it expected EU economic growth of 0.8% in 2023, up from the 0.3% it predicted in November 2022.
Falling energy prices were expected to be partly the cause both in the EU and across the Atlantic.
“Weaker cash buffers and tighter-for-longer financial conditions are
testing the resilience of the most fragile companies."
Allianz’s report also gave details on the financial trends within the market that could exacerbate or diminish the insolvencies.
“Beyond demand, prolonged pressure on profitability, weaker cash buffers and tighter-for-longer financial conditions are testing the resilience of the most fragile companies. This includes those with the least pricing power (e.g., specialised retail such as textiles, household appliances, and some services including restaurants).”
Whilst many countries have avoided technical recession the economic data remained mixed. Earlier this year, at the Insurance Investor Live Europe conference, James Pomeroy, Global Economist, HSBC, warned that while indicators looked better there were still risks. “We’ve gone through a year where everything has been remarkably resilient. We said last year that we’d definitely be in a recession. But where is this recession? New data out shows that the US is definitely not in recession,” said Pomeroy.
He added that 2022 was a "remarkably resilient year", despite awful sentiment. “Consumers just keep spending,” he said. However, his concerns were backed up by Allianz's data.
Pomeroy said the forward-looking data appeared “worse” with manufacturing and consumer behaviour “cooling”, which he said was due to pent-up spending appetite from the lockdowns ending. This, he said, meant that economies could take a hit. “A slowdown is coming but the real question is how bad will it be?” he said.
Allianz said their report showed other economic trends emerging as well, which could alter some insurance investment behaviour. “Cash is king, but credit management practices have deteriorated according to latest working capital requirements data,” it said and warned sectors with higher wage bills as being more at risk.
