Proceed with Skepticism
Economic hardship propels greater number of businesses into insolvency
Got the scoop on Germany's economy? Here's the latest:
ba Frankfurt
Corporate insolvencies have risen by an unprecedented 20% since the start of the year, with no signs of slowing down in 2022. Experts, however, urge caution and skepticism, as the peaks reached during the global financial crisis are still a far cry.
You might think that's a good thing, but let's dive a bit deeper.
Insolvency filings by 49,000 companies during the first three quarters of the year represent an increase of 9% compared to the same period in 2020. This is the highest level since the fourth quarter of 2011.
The future remains hazy.
Despite this grim picture, the German government clings to its bullish forecast of 2.1% economic growth for 2021. But the German Institute for Economic Research suggests this may be overly optimistic, given the current economic climate and the uncertainties surrounding Brexit and the US-China trade spat.
Now, here's where things get interesting. There are underlying issues at play that experts warn could prolong this wave of corporate insolvencies. Three key factors have been identified:
- The Pandemic Effect: Governments' aid programs and relaxed bankruptcy rules during the pandemic artificially suppressed insolvencies. These measures produced a backlog of financially distressed "zombie companies" that are now on the verge of collapse due to increased borrowing costs and tighter liquidity. This is why we might see a spike in insolvencies in 2022, despite temporary relief provided by the pandemic.
- Sector-Specific Stress: Industries such as construction, gastronomy, and logistics are grappling with soaring operational costs, labor shortages, and margin compression, mirroring trends in recruitment and tech sectors worldwide. These industries are particularly susceptible to the effects of interest rate hikes and wage increases.
- Macroeconomic Headwinds: Rising interest rates since 2021 have put a strain on companies refinancing their debt, while consumer spending is being reined in and economic uncertainty lingers. This pattern holds true in countries like Sweden, Japan, and the US, where similar post-pandemic insolvency spikes have been observed.
The surge in insolvencies in 2021 may mark just the beginning of a drawn-out wave. Experts caution that insolvencies often trail recessions, and current labor market resilience might not be enough to counter sector-specific weaknesses. So, while the initial comparison between 2020 and 2021 might show relative increases, it's important to remember that these issues run much deeper than they seem. Stay tuned for updates as the situation evolves.
- The peaks of corporate insolvencies reached during the global financial crisis are still far from the current 20% rise seen in Germany this year, but experts advise skepticism given the persisting trend.
- The German Institute for Economic Research has advised that the government's bullish forecast of 2.1% economic growth for 2021 might be overly optimistic due to the current economic climate and uncertainties surrounding Brexit and the US-China trade spat.
- The current wave of corporate insolvencies could potentially be prolonged due to underlying issues, such as the pandemic effect, sector-specific stress, and macroeconomic headwinds like rising interest rates.
- Outlook in the finance and business sector remains uncertain, as insolvencies often trail recessions, and current labor market resilience might not be enough to counter sector-specific weaknesses, indicating a drawn-out wave of insolvencies in the future.
