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BDO predicts record UK business failures this year

Rising unemployment and falling disposable income growth in the UK will lead to a sharp reduction in consumer spending and help to drive British business failures up to a record 36,200,

Rising unemployment and falling disposable income growth in the UK will lead to a sharp reduction in consumer spending and help to drive British business failures up to a record 36,200, according to a report by BDO Stoy Hayward.
 
According to the report, low interest rates and policy measures aimed at boosting the economy are not likely to halt the rate of UK business failures until at least  2011, paving the way for a far worse picture to come in 2010  where 40,400 (111 businesses everyday) are expected to go under.
 
As increasingly cautious shoppers emerge in the UK, the report forecasts a 4.0 per cent decrease in consumer spending this year which will impact sectors most reliant on disposable income, including retail, leisure and personal services. One of the main drivers behind falling consumer spending is the decline in employment which is expected to fall by 3.5 per cent in 2009 – the steepest decline since comparable records began in 1971, with a further 1.9 per cent drop in 2010.
 
Despite falls in mortgage costs and lower inflation, which have been linked to comparatively robust retail sales seen so far this year, the contraction in consumer spending will mean that 4,300 retailers will become insolvent in 2009 (a 33.3 per cent increase from 2008), according to the report. This figure is set to peak to 7,335 business failures in 2010.

Other sectors relying on consumer spending will also be affected. Business failures in the personal services sector, which includes hairdressers and dry cleaners, are forecasted to increase by 55.9 per cent this year to 1,910, and rise to 3,140 in 2010 as consumers tighten their belts. In the leisure sector, 2,550 businesses are expected to fail in 2009 and 3,690 in 2010.
 
With the UK economy shrinking by 1.9 per cent in the first quarter this year, the report forecasts a 4.5 per cent contraction in economic output in 2009, making this the steepest reduction in economic activity since the 5.1 per cent fall in 1931. Private sector investment is set to nose dive this year by 18.9 per cent as firms delay or cancel capital expenditures on weaker prospects for growth and continued troubles in accessing finance. This will push up business failures in sectors relying on business-to-business demand, such as telecoms, media and technology, where 2,500 businesses are expected to fail this year.
 
Also reflecting the cutback in corporate investment and the decrease in de-stocking are failures in the manufacturing sector, which is once again the worse hit by the economic downturn. Despite some tentative signs of optimism in the sector due to the competitiveness of British products sold abroad, (which has improved significantly as a result of the sterling depreciation) the number of business failures predicted in the sector for 2009 is 2,900 – an increase of 82.5 per cent from the 1,600 actual failures seen in 2008.
 
Shay Bannon, head of business restructuring at BDO Stoy Hayward, says: ‘Business failures in Great Britain are rising unabated as the fall-out of the economic downturn becomes ever clearer. Consumer spending is set for a steep contraction in 2009 and households will continue to be hit by rising unemployment, weaker earnings growth and reduced perceived wealth levels due to declining asset prices. This will drive up business failures in a number of sectors however, we expect slightly less businesses to fail in 2011 as the banking rescue package, rate cuts and other policy measures begin to significantly slow down the rate at which companies fail.’

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