In most proper recessions, there are a large amount of insolvencies, as businesses fold due to lack of demand, or the banks withdrawing their credit lines. In 1992, a record 55,000 businesses went bust.
So given the hysteria, how do things look at present? The graph at the top shows the number of Company Liquidations in England and Wales. The Insolvency Service says that total for the second quarter of 2008 was 3560 (1324 compulsory liquidations, and 2236 voluntary liquidations). The other thing to notice from the graph is that liquidations are lower than in 2002, when the after-math of the global dot-com crash was felt. Current company liquidations are in line with the creative destruction that you find in any healthy capitalist economy. They are nowhere near the alarming rates that you find in a true recession.
What about individual insolvencies? The press has been going on and on about personal debt. Individual insolvencies were 24,553 in the second quarter of 2008 - a fall of 2.0% on the previous quarter and a decrease of 8.3% on the same period a year ago. UK bankruptcy law was changed effective 2004, and as you can see from the graph, loads of people who were labouring under debt for years took the opportunity to sort their situation out. However that backlog is cleared, and since the Northern Rock scare last year, it appears that members of the public are taking care not to accumulate too much debt and to be defensive about their finances. It's not surprising really - sites such as Moneysavingexpert sprung up two years ago precisely to help people get out of debt and financial difficulties. Perhaps the drop in personal insolvencies is because the press has been going on about the problem for so long - there can hardly be anyone in the country who hasn't taken some defensive action as a result. The population has never been better informed - which in turn makes them more resilient.
5 comments:
I have two points to make on this.
Firstly the key point is time lag. We are only now going into a recession. Comparing figures for when the economy was growing/stationary, with 2 years into a recession (1992) isn't a fair comparison. My wife works in insolvency, she is rushed off her feet with new cases so I'd suggest these numbers are going to rise. I'm not saying this will be a s bad as 1991/2, just don't count your chickens. Note the peak was in 1992, when the main recession had been in 1991. Companies fight to stay afloat, they don't simply run up the white flag at the first signs of trouble. Given the BoE now forecasts 0% growth for 2008 that implies negative growth in Q3 & 4. Then we might start seeing a rise in insolvencies.
Secondly there is a drop in personal insolvencies but it is still far higher than it was. It has levelled out at 25k per quarter(has been there for 3 quarters). 100 thousand people going to the wall a year in nothing to be proud of.
The early 90's recession was from Q4 90 to Q2 92 - and insolvencies were very high throughout that period.
The point I was trying to make was that business insolvencies were higher in 2002 than they are now, even through growth was 2.4% in 2001 and 2.1% in 2002. So business is actually holding up well. I would say they've become more resilient in since 2002.
It's true that personal insolvencies are nothing to be proud of - but again the point is they are going down, despite the slowdown. You would expect the trend to be the other way if the slowdown was serious.
Company insolvencies are more serious since they affect the wider economy. Insolvencies are not a leading indicator; they are a following one, so you get a rise in company insolvencies after the economy worsens. Since most observers feel the worst of the downturn is still yet to come it is likely that the number of company insolvencies will rise. If you look at the Q2 2008 figures there is already a steep rise from Q2 2007 (15%) and the trend is up. The question of resiliency is only one we can answer after the end of the credit crunch, not now.
Yes, personal insolvencies are down from their peak but there the reason the figures are down a little is not a good one. The Insolvency Exchange is a consortium of banks who are the main players in personal debt. They have cut the number of IVAs they now accept since they will now not agree to anything less that 35p in the pound, up from 25p in the pound a couple of years ago. You can see that the number of bankruptcies has stayed roughly the same, it is IVAs that have come down. Often those turned down can not afford to go bankrupt (obviously you need cash up front to pay court and lawyer fees since no one offers credit to a bankrupt). So they are stuck with their debts and nowhere to go. But of course they don't show up on these statistics.
I see no evidence that the population is better informed about personal insolvencies. The stories my wife tells me bear witness to that. Behind these figures are real suffering. This is not something we should be complacent about.
You may have missed this
http://www.ft.com/cms/s/0/ab571028-723c-11dd-a44a-0000779fd18c.html
Employment lawyers and legal helplines in the UK are reporting a sharp rise in businesses seeking advice on how to sack staff, suggesting a further surge in redundancies may be on the way.
I agree that company insolvencies are more important that personal insolvencies. But what we are seeing is still lower than in 2002. In fact we are well within the normal "creative destruction" realms of insolvency that you get in any healthy capitalist economy - and these insolvencies are usually due to the business being badly managed or having a poor business plan, than to macroeconomic factors.
Insolvencies would need to increase by a factor of four to be of concern.
Regarding anecdotes yoru wife tells you - be careful, as she sees only the worst cases. In general the population at large is far more savvy about finance than they were 15-20 years ago, thanks to the proliferation of financial forums and consumer sites on the net.
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