Insolvencies: The US’s U-Turn

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For economists and businessmen alike a rise in the number of insolvent companies is like a canary in the mine. Once it shows signs of distress, the gold diggers should pay close attention. Perhaps even look for a quick way out.
So what can one make of an expected surge in insolvencies?  That is the focus of our new analytical study and an updated global insolvencies map. If one is to heed the warning embedded in the title - “keep an eye on the domino effect” – the problem can cascade across borders and industries quite fast.
Are we seeing an avalanche that might choke the global economy? Not at the moment. Yet Euler Hermes forecasts that insolvencies will increase by +2% worldwide in 2016, and again by +2% in 2017. A chart with forecasts for 43 countries, attached at the end of this post, also conveys a glum state of affairs.

Most significant is that the last half a dozen years were marked by improvement: the number of insolvencies was in decline ever since the financial crisis.
Now the trend has reversed, and the business mood has become murkier. After all, when more businesses struggle to meet their commitments or go bankrupt the economy as a whole might be choking.
Reasons include too-low-for-too-long growth, increased turbulence in some sectors (commodities is a clear example) and the domino effect of major bankruptcies. In 2015 there were 152 top bankruptcies by companies with turnover above EUR100mn, compared to only 95 in 2014.
Add to that the wide differences between regions of the world.
In 2016, Asia Pacific with +13% more business insolvencies than in 2015 and Latin America (+17%) are the hot spots.
In the U.S., for the first time in 6 years, bankruptcies should increase by +3%. This major shift is driven by the Metal and Energy sectors, accounting for half of public firms’ bankruptcies in 2015.
Western Europe is the only region where insolvencies are expected to decrease: -5% in 2016, and -3% in 2017. However, the annual number of bankruptcies remains higher than pre-crisis levels in 11 out of 17 European countries. This calls for cautious optimism, as increasing nonpayment risk in emerging markets is having a toll on exporters.
Europeans need not contemplate an escape from promising yet volatile markets. But it would be wise to make sure you have enough oxygen reserves.

Countries' insolvencies in 2016 (forecats, % change compared to 2015)

insolvencies by country 2016 forecast.png

Ludovic Subran
Chief Economist
Euler Hermes
If you would like to learn more about Euler Hermes in your country or near you, feel free to visit our countries’ pages.

 

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