Business failures fall to record lows

2004 is expected to record the lowest number of business failures for six years, according to experts at BDO Stoy Hayward.

The latest BDO Stoy Hayward Industry Watch reveals an 8 per cent drop in the number of companies going bust from last year’s figure of 17,550. This will bring the number of failures for 2004 down to 16,150, a rate of 0.9 per cent, equivalent to an average of 310 businesses going bust per week.

A soft landing for the economy is expected in 2005 although faltering consumer spending combined with an uncertain global economic outlook will dent business optimism. Consequently Industry Watch predicts that 16,250 businesses will fail in 2005, which translates into 312 firms folding per week. This increase is, however, slight and remains well below failure rates recorded in recent years.

Industry Watch’s sector analysis reveals that although most sectors should experience a drop in total failures for 2004, divergent trends emerge over the long term. The service sector, suffering until recently, has become a Cinderella story whereas in contrast, leisure sector growth will enter the doldrums, forcing out ailing firms as a result.

Some 2,660 service sector companies are expected to have folded by the end of 2004 – a drop of 21 per cent from last year’s figure of 3,370. The service industry, the first of the sectors to feel the pinch in a slowdown, is finally benefiting from a surge in demand from companies. Businesses keen to maintain an edge are expected to increase advertising and research spend, which is set to reduce the failure rate for the service sector to 0.8 per cent in 2004 and further to 0.7 per cent in 2005.

There is also good news for the manufacturing sector as the number of business failures is expected to drop from 2,440 to 2,230 by the end of 2004 – their lowest ever level since current records began in 1993. Moreover, with the pound expected to weaken against both the dollar and the euro, export markets should open up, cushioning manufacturers from the brunt of the slowdown. As a result, failures are set to fall further to 2,150 in 2005, keeping the failure rate down to 1.8 per cent.

Other sectors, particularly construction and property, have much less settled outlooks. The number of companies going bust in the construction industry is predicted to drop to 2,040 by the end of 2004, falling further to 1,750 in 2005 – once more the lowest since records began. However, as fewer building projects are commissioned due to the stalling housing market, the strain will start to show and business failures will climb 12 per cent to 1,960 by the end of 2006.

Finally, 2004 is expected to have been good for the leisure sector with some 1,060 companies expected to collapse, down from 1,120 in 2003. This is due to the resurgence of foreign tourists to British shores, together with increases in corporate hospitality. Unfortunately this reprieve seems short lived – the slowdown in consumer spending is set to reduce public demand for leisure services while interest rate rises make businesses reign in non-essential spending. As a result, BDO Stoy Hayward predicts that the number of failures will rise over the next two years to 1,130 in 2005 and still further to 1,260 in 2006.