Moderate Increase in Business Insolvencies; Slowing Down Trend
The rise in business insolvencies shows a decelerated pace.
In April, the rate of corporate insolvencies in Germany inched up by a mere 3.3%, as reported by the Federal Statistical Office. This marks the second month in a row with only single-digit growth, a sharp contrast to the double-digit increases experienced since summer 2024. However, the German Chamber of Industry and Commerce has emphasized that there's no room for complacency just yet.
To accurately incorporate insolvency applications into their statistics, the office waits for a court's decision, which typically occurs around three months after the initial application.
In February, the statistics office's final results revealed 2,068 regular insolvencies - a 15.9% rise from the previous year. These insolvencies amounted to approximately nine billion euros in claims, a significant jump from the four billion euros seen in the previous year. The sectors with the highest insolvency rates were transport and warehousing, other services, and the hotel and restaurant industry.
Volker Treier, the chief analyst at the German Chamber of Industry and Commerce (DIHK), offered insight amidst these numbers: "The February figure is the highest in twelve years. Sluggish demand domestically and abroad, high uncertainties due to US trade policy, and burdens on the domestic location due to taxes, energy costs, and bureaucracy are causing profitability issues for companies."
However, it's crucial to consider various factors that may be impacting the increase in corporate insolvencies.
- Global Economic Instability and Inflation: Aroused by high inflation rates across many OECD countries and heightened political tensions since the conflict in Ukraine, companies are facing considerable economic pressure. Rising costs associated with raw materials and labor can erode corporate profitability.
- Monetary Policies and Financial Risks: Persistent low interest rates may have allowed for a mispricing of risks, resulting in increased financial vulnerabilities. High leverage levels and the potential for asset bubbles could strain companies further.
- Government Regulations and Support: Germany's StaRUG (Corporate Stabilisation and Restructuring Act), implemented in 2021, offers restructuring options outside formal insolvency proceedings, potentially decelerating the insolvency rate. Future relief may also come from the planned reduction in corporate tax rates, starting from 2028.
- Market Conditions and Corporate Restructuring: The overall market volatility and increased prospect of corporate insolvencies in Europe (e.g., the U.K.) may impact German businesses indirectly through supply chain disruptions or decreased demand.
Taken together, this trend of slowing corporate insolvencies in Germany may reflect a blend of challenging economic conditions, supportive regulations, and tumultuous global markets. While the StaRUG initiative provides some relief for distressed companies, broader economic pressures persist, contributing to the ongoing struggle of businesses to maintain profitability.
- The continuing rise in global economic instability and inflation, as seen in many OECD countries, coupled with heightened political tensions after the conflict in Ukraine, puts considerable economic pressure on companies, potentially eroding their profitability due to increased costs of raw materials and labor.
- Persistent low interest rates across the financial market may lead to a mispricing of risks, resulting in increased financial vulnerabilities for businesses, with high leverage levels and the potential for asset bubbles straining companies further.
- The implementation of Germany's StaRUG (Corporate Stabilisation and Restructuring Act) in 2021 has provided restructuring options outside of formal insolvency proceedings, which might explain the decelerated insolvency rate experienced in recent months. However, relief may also come in the future with the planned reduction in corporate tax rates, starting from 2028.
- The broader market conditions, including ongoing volatility and the increased prospect of corporate insolvencies in Europe, such as the U.K., can indirectly affect German businesses through supply chain disruptions or decreased demand, contributing to the ongoing struggle of businesses to maintain profitability.
