Corporate insolvencies are on the rise globally, but nowhere as much as Western Europe, which is expected to see a 3% uptick in 2019. This marks the first increase in insolvencies in the region in six years. Slowing economic growth, slowing global trade growth, and uncertainty surrounding U.S. trade policy and Brexit are the main culprits.
Among Western European countries surveyed by Atradius economists, the United Kingdom and Italy are set the see among the worst insolvency deteriorations, at 7% and 6%, respectively. France, Switzerland, the Nordic countries, the Netherlands, Sweden, Austria, Belgium, and Ireland are also expected to see insolvency increases.
The eurozone has a relatively bleak growth outlook, with only 1.3% growth expected this year and 1.5% in 2020. This sluggishness touches even major economies such as Germany, France, and the United Kingdom. Because GDP growth — or the lack thereof — is closely tied to insolvency growth, this spells trouble for corporate insolvency rates.
Italy’s poor insolvency outlook in particular can be attributed to the country’s fiscal struggles. Although insolvencies there declined 6% in 2018, the current recession there is expected to reverse that progress, causing a rise of 6%. In addition to economic stagnation, factors dampening the business environment include political and policy uncertainty, weak domestic demand, and tight credit conditions.
Poor payment practices, especially within the public sector, also contribute to Italy’s negative insolvency outlook. With the exception of the food and chemicals industries, payment duration in other key sectors remains long — as much as 120 days. This puts liquidity pressure on Italian companies, especially smaller suppliers.
French companies are also under pressure from the current economic stagnation. More than 55,000 cases of insolvency are forecast for this year — a level matching that seen in the 2008 crisis, the onset of France’s deepest recession since the end of World War II. Ongoing social protests and constraints in labor supply and production capacity weigh on business sentiment, while corporate debt has increased to more than 70% of GDP, putting businesses at increased risk of default.
Eurozone economies depend heavily on trade, with the region accounting for approximately 25% of world trade. The geographic orientation of eurozone exports and its focus on industrial goods (think German cars) make the region particularly vulnerable to trade slowdown.
Germany, for instance, is expected to see an increase in insolvencies (2%) for the first time in nearly a decade, thanks to the marked slowdown in world trade and the potential imposition of U.S. import tariffs on car and car parts.
The biggest threat hanging over the eurozone’s insolvency outlook is trade policy uncertainty. Uncertainty is toxic to the business environment, as it causes companies to postpone investments, raising default risks down the supply chain.
Consider the United Kingdom, where Brexit casts an ominous cloud of uncertainty. Each quarter of 2018 saw business investment contracting, while economic policy uncertainty saw a sharp upward trajectory. In 2019, investment is expected to contract 1.4%, while bankruptcies are anticipated to rise 7%, following on the heels of a 10% increase in 2018, with a notable concentration in the construction and retail sectors.
This outlook, however, is based on an orderly Brexit at the end of October. Negotiators for the UK and EU reportedly agreed on a draft Brexit deal early on Thursday, but optimism that the British Parliament will approve the pact isn’t running high. If there isn’t a smooth Brexit, the insolvency rate could be even worse this year.
Eurozone companies outside the UK are also vulnerable to Brexit uncertainty. Firms in Belgium, Denmark, and the Netherlands have close ties to the UK. The insolvency outlook in all three countries is already expected to increase modestly in 2019; a no-deal Brexit could spell increased risk.
Ireland is at particular peril should a no-deal Brexit occur. Insolvencies decreased over the past six years, but the trend isn’t likely to continue, and uncertainty around Brexit is largely to blame.
The UK market accounts for approximately 15% of Irish goods and 20% of services exports, so a potential economic downturn in the UK and the outcome of the ongoing trade negotiations could have a negative effect on Ireland’s economic performance. The manufacturing and food sectors are most exposed to risks at the moment due to their high dependence on exports to the UK.
Another source of uncertainty for eurozone companies is the possibility of an escalated trade war between the EU and the United States. The U.S. has announced its intention to impose a slate of tariffs on $11.2 billion of goods from eurozone countries and continues to threaten more of the same, in retaliation for alleged EU subsidies for Airbus.
It’s almost certain that if the tariffs take effect, retaliatory moves would emanate from Europe. Last January the EU threatened to impose $23 billion in tariffs on U.S. products should the Trump administration follow through on its threat to implement tariffs on European automobile imports.
Given the rise in insolvencies expected in the eurozone this year, companies that trade with firms in these countries would do well to protect themselves against customer bankruptcy and the inability to pay. Trade credit insurance, for instance, can provide protection for the majority of accounts receivable and help keep businesses apprised of imminent risks. [Editor’s note: Atradius sells trade credit insurance.]
Dana Bodnar is an economist at Atradius, where she is responsible for macroeconomic and country risk analysis specializing in Central and Eastern Europe.