A recent study conducted by the UK’s Economic and Business Research Center warns of a potentially grim economic horizon, suggesting that approximately 7,000 companies could declare bankruptcy every three months in 2024.
This alarming trend is attributed to rising interest rates causing financial strain, pushing the UK’s economy towards recession.
The debts that have accumulated during the COVID-19 lockdown periods, coupled with the rising borrowing costs and the cost-of-living crisis, are expected to particularly impact the retail and hospitality sectors. According to The Guardian, more than 6,700 cases of “business distress” were recorded in the UK in the second quarter of 2023, doubling the number from a quarter during the pandemic.
The center noted that insolvency cases during this period were up by 50% compared to the same quarter pre-pandemic in 2019, with an average of 4,100 on a quarterly basis between 2015 and 2019.
The Bank of England has raised interest rates 14 times since the end of 2021, from 0.1% to 5.25%, adding pressure to already debt-burdened households and companies. The study anticipates two more hikes in the current cycle, pushing the Bank’s interest rate to 5.75%.
The research center stressed that “the worst is yet to come in terms of borrowing costs, especially considering the fixed-term loans offered when interest rates were lower, which are now being rolled over at the new, higher rates.” Looking ahead, the center forecasts that corporate bankruptcy rates will remain high as interest rates continue to climb, pushing debt repayments to unsustainable levels for some businesses.
With the economy entering a recession – defined as two consecutive quarters of contraction – there’s potential for the Bank to initiate interest rate cuts in an attempt to boost demand. However, the Bank has hinted that interest rates are likely to remain elevated for an extended period as it combats soaring inflation, which currently stands at 6.8%, three times above its official target of 2%.
The United Kingdom’s economy, like many others, has faced unprecedented challenges due to the COVID-19 pandemic. Stringent lockdowns disrupted business operations, leading to significant financial strain across various sectors. The government and the Bank of England have been using monetary policies as tools to mitigate the economic impacts, but the balance between stimulating the economy and curbing inflation remains delicate.
High interest rates, while helpful in controlling inflation, can stifle business growth and investment, potentially leading to higher unemployment and economic downturn. The current scenario, with businesses already grappling with pandemic-related debts and now facing escalating borrowing costs, paints a concerning picture for the UK’s economic health in the coming years.
