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5 challenges make 2024 year of reality check for firms, economy
PHILLIP ISAKPA IN LONDON, UK
Average global business insolvencies, which raced to a positive 29 percent in 2023 from +23 percent in 2022, is expected to maintain another acceleration this year at +9 percent year-on-year before stabilising at a high level in 2025, says global insurer, Allianz, in its ‘Global Insolvency Outlook: Reality Check’ report recently made available to Business a.m.
The report noted that the acceleration to +29 percent in 2023 represented the fastest momentum since 2009 when the global average increase in business insolvencies printed +33 percent on the back of the global financial crisis of 2008.
But Allianz said, “While we do not expect a repeat of the tsunami of insolvencies seen after the 2008 financial crisis, advanced economies will face a noticeable catch-up in 2024. In 2008 and 2009, business insolvencies skyrocketed by +17% and 19% y/y, respectively. But for 2024, our central scenario suggests a +9% y/y increase in business insolvencies, with most regions and four out of five countries seeing rising numbers and the largest increases notably in the US (+28% y/y), Spain (+28%) and the Netherlands (+31%).”
According to the report, this broad-based rise would push two out of three countries above their pre-pandemic number of insolvencies in 2024 (2016-2019 average), from half of them in 2023, adding that in 2025, it expects there to be a “somewhat stabilisation of our Global Insolvency Index,” with a majority of countries expected to post a trend reversal put at -9% y/y in simple average for the countries concerned. The report noted that European countries would see the largest declines, most often from a strong bounce-back over 2021-2024 and/or from a historic high.
The report described 2023 as recording “a high-speed and broad-based rebound in business insolvencies,” but that this was expected, adding that 2024 started with insolvencies above pre-pandemic levels in most advanced economies.
“The number of business insolvencies rebounded in three out of four countries in 2023, with most recording a double-digit increase,” it stated in a review of last year’s figures.
It noted that while business insolvencies accelerated last year, there were exceptions in emerging markets, notably the BRICS – Brazil, Russia, India, China and South Africa.
“But they account for a noticeable share of global GDP (30%) and thus our global insolvency index (38%), lowering the annual increase of our headline indicator,” the report authors explained.
Regarding Allianz’s global insolvency index, the report stated that this increased by +7 percent for the full year of 2023, from +1 percent in 2022, noting that Western Europe was a key contributor to the global rise despite having a slower rebound of +15 percent year-on-year, with a stable momentum at the Eurozone level of +14 percent.
“North America also boosted the global rebound, with the US recording a major surge (+40% y/y), while the prolonged low number in China offset the increase in insolvencies observed in most other Asian countries (Japan, South Korea, Australia, Hong Kong, New Zealand),” the authors wrote.
The acceleration in 2024 and stabilisation at a high level in 2025 that the report predicts will be on the back of the projections that four out of five countries will see business insolvencies increase this year at +12 percent year-on-year on average.
The ‘Allianz Global Insolvency Outlook’ authors said they identified five main challenges that will make 2024 a year of reality checks for companies and economies around the world, particularly in Europe.
The first reality check, they said, is that there is a looming profitability squeeze, noting that before benefiting from the global recovery in sight for 2025, firms will have to manage the deceleration in global demand that may affect them directly or indirectly.
“In several countries, the level of activity is unlikely to reach the minimum required to at least stabilise the number of insolvencies, with below-trend GDP growth in particular in the US (+1.4% in 2024), the Eurozone (+0.8%) and emerging markets, including China (+4.6%),” they wrote.
According to the report, going by long-term sensitivities, the Eurozone and the US would both need +0.7pp in additional GDP growth on average in 2024-2025 to stabilise their numbers of insolvencies, with both only gradually reducing the GDP gap compared to 2023, adding that weaker-for-longer demand is likely to result in increased competition, leading to reduced pricing power and declines in revenue growth, increasing the pressure on profitability at a time of still-high operating costs, with little relief from energy prices and recovering labour costs.
Elaborating on this looming profitability squeeze, the report cited recent earnings seasons that have already shown listed firms with comparative advantage, including in pricing power, starting to feel the pinch from waning demand and high production costs, as well as lingering supply chain pressure.
“This is notably the case for consumer durables, pharmaceuticals, paper, chemicals and metals. The latest market expectations also confirm the margin squeeze ahead: As of mid-February, analysts have revised down their estimates for earnings per share (EPS) for the full year 2024 by -0.7pp globally, with similar revisions for Europe (-0.7pp) and the US (-0.8pp),” the report stated.
Companies and economies will also be faced with the reality check of rising uncertainty, including from geopolitics to rising non-payment risk, the report noted.
Specifically, it mentioned that following a series of recent years of shocks, “the packed election calendar in 2024 will add to economic uncertainty as countries that account for 60% of global GDP head to the polls. This context will add a layer of complexity and risk to business operations by making it harder for firms to make accurate forecasts and business plans, and creating volatility in input costs, such as for raw materials, and FX, making it difficult for firms to effectively manage their supply chains and budgeting processes.”
Allianz added that regulation, which is on a rise, may force firms to make costly additional efforts to comply, noting that its non-payment risk score reveals that firms are getting more and more concerned by non-payment.
The report also sees a third reality check for firms in financing and liquidity conditions, which are still tight, and observed that “central banks may pivot earlier than previously expected, thanks to the accelerating pace of disinflation, but interest rates are unlikely to decrease significantly in the short run,” it state, observer, however, that it still expected to see more lagging effects of past decisions in monetary policies.
“In this context, firms will continue to face costly financing, maintaining concerns on their capability to absorb the costs of borrowing and mitigate the pressure on overall profitability, while the limited availability of financing will put the most exposed sectors and firms at risk,” the report explained.
New businesses are also primed to face what the report called their first real resilience test as part of the reality checks for 2024. It noted that startups and younger firms often face a higher risk of financial difficulties and insolvency compared to their more established counterparts, which can weather economic downturns better.
Accordingly, the report stated that post-pandemic acceleration in business creation is likely to push up the ‘natural’ rise in business insolvencies in 2024; and observed that in Europe, new business registration proved to be +14% higher in 2021-2023, compared to 2016-2019.
“For those firms, 2024 will be the first ‘true’ test of resilience, especially in the countries that saw the most new businesses created, notably France (+47%), the Netherlands (+28%) and Belgium (+14%). In terms of sectors, the information/communication (+32%), transportation/storage (+28%) and real estate/B2B services (+24%) are the ones to watch,” the Allianz report stressed.
The fifth reality check for firms this year, according to the report, lies in the fact that some sectors pose higher risks to jobs and the economy, with construction and real estate catching up with hospitality, transportation and wholesale/retail.
The report authors wrote: “The sectors and firms most exposed to the risks of weaker-for-longer demand and prolonged high financing costs are those that rely on discretionary spending (manufacturing and retail of non-essential goods, hotels, restaurants, tourism and other leisure activities) and labour-intensive ones (construction, road transportation, hotels, restaurants, health care, specific business services).
“In 2024, these sectors will boost national numbers of business insolvencies due to the cyclical downturn and because of the relatively higher number of firms and share of SMEs,” they concluded.
