For a while now, there have been persistent suggestions that the UK could be on the verge of entering a recession – and according to at least one authoritative source, that moment may finally come late this year and into 2024.
The economic consultancy, the Centre for Economics and Business Research (Cebr), has said that it expects the Bank of England (BoE) base rate to be put up twice more from its current 5.25%.
The thinktank added that such lingering highs in the country’s interest rates could exert financial strain on businesses and bring about recession, with about 7,000 businesses failing every quarter during 2024.
Business insolvencies are already much higher than was seen before – and during – the pandemic
As reported by The Guardian, Cebr said that increasing numbers of businesses were likely to be driven into insolvency by a combination of factors. These factors, the thinktank said, would include not only high borrowing costs, but also the general ongoing cost-of-living crisis, and debt that firms had taken on during the COVID-19 pandemic.
The consultancy also indicated that businesses in the hospitality and retail industries were likely to be especially vulnerable.
2023’s second quarter reportedly saw more than 6,700 business insolvencies in Britain. This was more than double the typical amount of insolvencies seen each quarter during the pandemic, when significant numbers of firms benefitted from a variety of support measures that largely protected them from failing.
As for the levels of business insolvencies that occurred prior to the pandemic, Cebr said they averaged around 4,100 every quarter for the years from 2015 to 2019.
The consultancy observed that the number of British business insolvencies in the second quarter of this year was 50% more than the level seen during the same quarter in 2019, the last pre-pandemic Q2 period.
“The worst is yet to come in terms of borrowing costs”
With the BoE having increased interest rates 14 times since 2021 – from 0.1% to 5.25% – firms engaged in accounting in Newton Abbot will already be more than familiar with the pain such rises have brought. And unfortunately, it seems this particular story is unlikely to be over yet.
Cebr said that it anticipated two more increases in the current cycle, bringing the peak Bank rate to 5.75%.
This, the consultancy observed, meant “the worst is yet to come in terms of borrowing costs, quite apart from the impact of fixed-term loans made when interest rates were lower being rolled over at the new higher rates.”
The thinktank added: “Looking ahead to the future, Cebr expects the rate of business insolvencies to remain high as interest rates continue to rise, pushing up debt repayments to unsustainable levels for some businesses.”
Cebr stated that with its models suggesting there could be an average of 7,000 business insolvencies per quarter in 2024, it was forecasting a recession in the UK. It said that it expected this to take the form of two consecutive quarters of reduced GDP in the fourth quarter of 2023 and the first quarter of 2024.
The recent tough times, then, look set to linger on over the coming year, at least – especially if the BoE chooses to hold high interest rates in place for an extended period, as the Bank’s chief economist, Huw Pill, recently suggested could be the case.
To learn more about how our services in accounting in Newton Abbot here at TS Partners could assist your firm’s efforts to navigate its way through the challenges to come for the UK economy, please don’t hesitate to reach out to our local office.