Corporate problems stabilise in Birmingham with small dip in distress levels during Q2

According to Begbies Traynor’s Red Flag Alert research for Q2 2018, which monitors the financial health of UK companies, 472,183 businesses were experiencing ‘Significant’ financial distress at the end of June 2018, up 9% compared to the same stage last year (Q2 2017: 434,492) but down 1% compared to the previous three months of the year (Q1 2018: 477,183). 

Following a spate of positive economic updates over recent weeks, the Red Flag Alert data also reveals that levels of financial distress are increasing at a slower rate year on year than during the previous four quarters (Q1 2018: +33%, Q4 2017: +36%, Q3 2017: +27%, Q2 2017: +25%), which could be a tentative sign of returning stability across the economy. 

The trend was reflected in Birmingham, where the number of businesses in ‘Significant’ distress fell marginally from 7,164 in Q1 2018 to 7,064 in Q2 2018. Twelve months ago, there were 6,578 firms experiencing ‘Significant’ problems in the city. Across the Midlands, the number of businesses in ‘Significant’ financial distress fell from 57,491 in Q1 2018 to 56,612 in Q2 2018, up from 53,755 in Q2 2017.

The sectors with the highest number of businesses in distress year on year were Support Services (112,434, up 10%), Construction (60,208, up 4%), Real Estate (42,254, up 19%), Telecoms (31,770, up 9%) and General Retailers (30,574, up 4%). However, on a quarterly basis, levels of ‘Significant’ distress across these key sectors appear to have stabilised, fluctuating between -2% and +1% compared to the first quarter of 2018. 

Regionally, businesses in the South of England continued to see the biggest deterioration in their financial health, with London being the UK’s worst performing region, where ‘Significant’ distress impacted 118,367 companies in the Capital alone (up 17% year on year, but down 1% compared to Q1 2018). 

In Birmingham, many sectors experienced a stabilising of distress levels between Q1 and Q2 2018, however, a number showed a long-term trend of entrenched problems. During the year to Q2 2018, an additional 98 Real Estate and Property Services firms (506 to 604) found themselves in trouble. The city’s Bars & Restaurants and General Retailers were also affected, with 12% (259 – 291) and 11% (437 – 485) respective increases in ‘Significant’ in the past 12 months to Q2 2018. 

According to the research, 251,495 UK businesses ended the period in a position of negative net worth1, while 109,717 demonstrated a considerable increase in their working capital deficit; both key indicators of financial distress.

Mark Malone, Partner at Begbies Traynor’s Birmingham office, said:

“Whilst distress levels remain high, these latest figures are a source of encouragement and a sign that the economy in Birmingham and wider Midlands region is proving as resilient as any part of the UK economy. We put this down to growing consumer confidence linked to improved job security, solid wage growth and a dampening of fears that interest rates were going to rise significantly. 

“We expect the positive trend to continue but with problems in certain industries, such as retail where there have been a plethora of casualties of well-known High Street brands. Estate agents are also facing difficulties, as a result of ongoing disruption in the market by digital players. 

“Looking at other factors affecting the economy, Brexit uncertainty perhaps places the biggest question mark over the future. But business confidence hasn’t been massively affected and many firms feel that any disruption caused by the UK exiting the EU is likely to be minimal.”

Ric Traynor, Executive Chairman of Begbies Traynor, commented:

“With snow grinding thousands of UK businesses to a halt back in March, the return of warmer weather in Q2 and a timely boost from the royal wedding in May helped the UK bounce back to growth in June, as our research and other key economic indicators point to a steadying business environment across the country. 

“Stronger growth in the UK’s service sector, boosted by increased demand for financial services, combined with a surprise rebound in construction activity in June, which increased at its fastest level in seven months, are both clear bellwethers for a rebounding economy. 

“However, with manufacturing growth down on last year, continued the inflationary pressure, slowing wage growth and potential rate rises on the horizon, we’re not out of the woods yet. There still remains a heightened level of distress among UK businesses and the slight improvement in the second quarter could yet prove to be temporary.”