UK businesses braced for six months of Brexit turmoil with Scottish distress levels rising – Begbies Traynor

Data drawn from the insolvency firm’s Red Flag Alert research for Q2 2016, which monitors the financial health of UK companies, shows that in the three months preceding the EU Referendum, levels of ‘Significant’ financial distress among UK businesses fell for the first time since Q3 2015, as the UK economy showed tentative signs of stability ahead of the Brexit vote.

The research also showed levels of ‘significant’ Scottish business distress, the signals that indicate the early signs of financial problems, have steadied in the last three months.

The quarterly Red Flag Alert data showed that the most common indicators of business distress have risen just 2 per cent year on year, compared to a 20 per cent hike in the previous quarter.

The rise in Scotland is just 1 per cent higher than the UK average, with just Northern Ireland (5 per cent) showing a noticeably larger growth in distress.

In total, firms in Scotland showed 13,959 instances of significant business distress in the second quarter of the year. Once again the figures confirmed that small businesses are carrying the brunt of the hardship, with 93 per cent of all distress reported by SMEs.

More concerning was a 10 per cent year-on- year rise in instances of critical distress levels in Scotland, which include decrees totalling over £5,000 and winding-up petitions.

There was a total of 65 instances across Scottish business, with only Wales (34 per cent increase) and Northern Ireland (29 per cent) seeing bigger rises, and the whole of England recording falling distress, with a UK average fall of 5 per cent.

Across the UK, levels of ‘Significant’ distress fell by 4 per cent during Q2 2016, from 274,595 struggling businesses in Q1 2016 down to 263,517 companies in the past three months, of which 93 per cent (244,402) were small to medium sized businesses (SMEs).

“It was remarkable that every single region of England showed a decline in the most serious critical indicators of impending business failure, while Wales, Northern Ireland and Scotland all showed double-digit rises,” said Ken Pattullo, who leads Begbies Traynor in Scotland and Northern Ireland.

Scottish businesses that saw the largest increase in significant distress totals in the last quarter, compared to a year ago, included: utilities (38 per cent); hotels and accommodation (17 per cent); professional services (13 per cent); food and beverages (8 per cent). Across the UK, the largest rises in significant distress were similar with the biggest rises in the utilities (6 per cent), hotels and accommodation (6 per cent), food and beverage (6 per cent) sectors.

“Utilities and tourism-reliant businesses were taking a battering in the second quarter, and there might finally be some good news for those sectors beyond the referendum.

“The figures were largely recorded pre -Brexit, however there is no doubt that Brexit was hindering investment ahead of the vote, and will cause a further stall on big capital spending, and a potential halt on projects that were heavily reliant on European funding,” said Mr Pattullo.

“That said, the unwelcome uncertainty and the impact on the pound has had some pretty immediate fringe benefits for the oil and gas sector that are impacted heavily by the dollar, as well as for other Scottish exporters.

“Over the coming months, this is likely to wash into the tourist and hospitality businesses as well, which is welcome as together they have seen the largest rises in early warning signs of any sector. Regardless of the politics there will be some winners for whom a weaker pound is a bonus,” he added.

The sector most exposed to economic volatility remains to be UK construction and real estate, in which 49,186 firms were classified as experiencing ‘Significant’ financial distress in the period.

Overall, levels of financial distress decreased across every sector and every region of the UK economy, but the most marked improvement in financial health during Q2 was among London-based businesses, where the number of companies experiencing ‘Significant’ distress fell by 5 per cent to 43,737 (Q1 2016: 46,234 companies).

The findings echo former Chancellor George Osborne’s comments in the wake of the Brexit result that the UK economy is “about as strong as it could be to confront the challenge our country now faces”.

However, Begbies Traynor warns that over the next six months at least, any positive improvements seen since April are likely to be reversed following the immediate negative impact that the Brexit result had on British businesses.

Julie Palmer, partner at Begbies Traynor, said: “Our data shows that levels of ‘Significant’ corporate distress decreased across all regions and all sectors of the economy in the lead up to the Referendum vote; the first time we’ve seen such an improvement since the period immediately following last year’s General Election. This suggests that UK businesses were in a relatively stable and improving financial position ahead of the Brexit vote, however we expect this trend to reverse as a result of the uncertainty created since then.

“UK construction and real estate has certainly been hit hardest following the Brexit result, with many high profile investors pulling out of UK property over the past three weeks. With experts predicting that London property prices could plummet by as much as 20 percent and nearly 50,000 firms in this sector already suffering from ‘Significant’ financial distress, the foundations for this sector are looking decidedly shaky.”

Ric Traynor, Executive Chairman at Begbies Traynor said: “Although more than half the country voted for a Brexit, the result has undoubtedly caused a spike in uncertainty while raising concerns over job security, contributing to weaker consumer confidence and the deferral of investment plans, all of which is likely to impact spending and business growth in the short term.

“The Bank of England’s commitment to maintaining interest rates at a record low, as well as the Government’s inference that they might cut corporation tax to less than 15 percent, could help to stabilise the economy and consumer sentiment over time. However we expect the business environment to worsen over the next six months, at least, before we settle into the ‘new normal’.

“Assuming Prime Minister Theresa May and her new Cabinet do invoke Article 50 as planned, the process of exiting the EU, while at the same time agreeing new trade agreements, is likely to be a long and drawn out affair, so businesses should prepare themselves for the long haul.”