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Business failures set to rise after two year lull

Mar 22 2005
2005 will mark the beginning of a sea change for UK business as the number of firms going bust is expected to increase for the first time in two years, according to experts at BDO Stoy Hayward.

The latest BDO Stoy Hayward Industry Watch reveals a 3 per cent increase in the number of business failures from last year. This is equivalent to an average of 315 businesses going bust per week.

Since 2003, there has been a steady decline in the number of businesses failing but this is set to change. A tough year is expected for businesses in 2005 with increases in inflation and interest rates, a decline in consumer confidence and a more volatile global economic environment likely to result in an increasing number of businesses failing. Consequently, Industry Watch predicts that 17,043 businesses will fail in 2006, a further 4 per cent increase from 2005.

Industry Watch’s sector analysis reveals that both retail and leisure are likely to be hit hard as both sectors suffer from a decline in consumer confidence. In comparison, manufacturing will see the lowest number of business failures since current records began in 1991 as it benefits from a weakening of the pound.

Some 1,101 retail businesses are set to go bust by the end of 2005 – an increase of 13 per cent from 2004; the sharpest rise in ten years. The end of the UK consumer boom is expected to push retail sector business failure numbers up with the business failure rate increasing to 0.5 per cent. Nevertheless, retail business failures will still remain at an historically low level. Falling interest rates, expected in 2006, are expected to ease pressure on retailers which is likely to result in the number of business failures in 2006 falling by six per cent.

There is also an unsettled outlook for the leisure industry with 1,170 businesses in the sector expected to fail in 2005 - an increase of 12 per cent from 2004. The consumer spending slowdown is expected to hit household demand for leisure services, as interest rate rises will be hitting companies’ margins. This is set to increase the failure rate for the leisure sector to 0.7 per cent. Business spending on corporate entertaining is unlikely to be enough to bring the number of failures down. As a result, this uncertain outlook is set to continue into 2006 with the number of business failures expected to rise again to 1,256.

The latest report reveals that it isn’t all doom and gloom for businesses. There is good news for the manufacturing sector with the number of business failures expected to drop to 2,178 by the end of 2005 - the lowest number of business failures since current records began. The business failure rate has also dropped to 1.8 per cent from 1.9 per cent in 2004. However, it is likely that this is a temporary revival and 2006 will see an increase in the number of business failures. Manufacturing may benefit from an expected weakening of the pound in 2006, but higher inflation and weaker domestic demand are likely to squeeze manufacturers’ profit margins.

Shay Bannon, Business Restructuring partner at BDO Stoy Hayward commented: “The UK consumer boom is over. Falling house prices are lowering consumer confidence. As a result, sectors dependent on domestic consumer markets will find themselves in a difficult position as post-election fiscal tightening keeps consumers’ disposable income down.”

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