A softer but broader based rise in corporate insolvencies
- At a global level, the upward trend in business insolvencies continued in 2019 (+9% y/y), mainly due to the prolonged surge in China (+20%) and, to a lesser extent, a trend reversal in Western Europe (+2%) and North America (+3%). In this context, our proprietary Global Insolvency Index bounced back to just slightly below its 2013 level.
- On top of this higher number of insolvencies, we identify a persistent high level of failures of large companies – those with over EUR50mn of turnover - with 249 major insolvencies totaling more than EUR145bn in turnover in Q1-Q3 2019. The hot spots were construction in Asia; energy and retail in North America and retail and services in Western Europe.
- In 2020, business failures are set to rise for the fourth consecutive year (+6% y/y). The combination of a low-for-longer pace of economic momentum, notably in advanced economies and in the industrial sector, and the lagging effects of trade disputes, political uncertainties and social tensions, will keep companies under pressure.
- ·While the easing of global monetary and financial conditions will help, increased price competition and higher salaries will limit margins and translate into additional woes for a higher number of companies in a majority of countries.
- Asia will be the key contributor to the rise in insolvencies (+8% y/y) in 2020, notably due to China (+10%) and India (+11%). Western Europe, where economic growth will remain below the historical threshold which usually stabilizes the number of insolvencies (+1.7%), will see an increase in most countries, but the latter would be moderate, notably in Germany (+3%), Italy (+4%) and Spain (+5%), as well as the UK (+3%).
- All in all, four out of five countries will post a rise in insolvencies in 2020, with Brazil (-3% y/y) and France (0%) as the key exceptions. As a result, one out of two countries will register more insolvencies in 2020 than before the financial crisis.
Chart 1: Insolvencies in 2020 (yearly change in %)
Global business insolvencies are set to increase by +6% in 2020
In 2019, global insolvencies rose for the third consecutive year. Indeed, our Global Insolvency Index, which covers 44 countries that account for 87% of global GDP, is expected to record a +9% y/y increase for 2019. This outcome reflects a prolonged surge in China (+20%) and, to a lesser extent, a trend reversal in Western Europe (+2%) and North America (+3%); it also reflects a slightly worse than expected trend compared to our previous forecast released in September (+8%), due to a more elevated number of insolvencies in specific countries such as Chile, Colombia, India, Russia and Singapore.
Indeed, 2019 has been marked by at least two key factors which contributed to this outcome: first the softer macroeconomic tempo; secondly the higher level of uncertainties due to both political issues and trade disputes. All in all, corporates not only faced weaker global demand, but also weaker global trade, notably in goods and in value terms, which led to weaker global manufacturing and increased price competition, on top of inventory issues due to preventive stockpiling (for example, the Brexit case) or oversupply (i.e. in the automotive sector). The implementation of new types of insolvency procedures and the cleaning of business registers through the official insolvency procedures in a few countries also explains the overall increase in insolvency figures.
In this context, the upside trend proved to be broad-based, with insolvencies on the rise across all regions and across a majority of countries, both emerging and developed ones. Based on the latest infra annual data available per country, we expect 29 countries of our sample (i.e. 66%) to end 2019 with more insolvencies than in 2018.
The risk of major insolvencies also remains high. Indeed, the first three quarters of 2O19 pointed to another batch of 249 insolvencies of major companies – namely those with over EUR50mn of turnover. This represents a relatively stable number of cases compared to the same period of 2018 (+1) but still a worsening severity in terms of cumulative turnover (+ EUR39.1bn to EUR145.2bn), which could have serious domino effects on providers along supply chains. In this regard, retail (with 37 major insolvencies over Q1-Q3), construction (33) and services (27) were the most concerned sectors in 2019, and Western Europe (104), Asia (64) and North America (51) the most impacted regions (For more details).
For 2020, we expect another increase in insolvencies, the fourth consecutive year of a rising trend, albeit at the slowest pace since 2016 (+6%). This outlook reflects a set of challenges that companies will face in 2020 on top of their business-as-usual issues: (i) a moderate pace of economic growth, with key economies, notably the advanced ones, to record below potential GDP growth, which has historically proved to be necessary to stabilize the level of insolvencies (+1.7% for Western Europe); (ii) the lagging effects of trade disputes, notably weaker trade, rise in input costs and supply-chain switches creating winners and losers; (iii) the lagging effects of political uncertainties and social tensions, notably in terms of inventory issues and loss of business and (iv) a prolonged discrepancy between manufacturing sectors, which are more exposed to international trade issues, and services sectors, which are benefiting from the resilience of domestic demand.
In other words, we expect softer demand to increase the vulnerability of companies with high fixed costs and firms with larger inventories or working capital requirement issues, while tougher price competition and an increase in production costs, notably wages, will limit margins and translate into additional woes for many companies. At the same time, we expect monetary policies to keep on being supportive in 2020, by contributing to a more sustainable debt financing in the short run; they will help to reduce the rise in insolvencies in 2020 but they won’t stop it and, on the contrary, they will increase liquidity risks on a more medium-term perspective.
In 2020, we expect four out of five countries to register an increase (compared to 2 out of 3 in 2019) in insolvencies. We also expect one out of two countries to record more insolvencies than registered on average over the 2003-2007 period, prior to the financial crisis of 2008. Countries which exhibited dynamic business creation over the past years would face an extra volume of insolvencies due to the number of young companies too weak to survive.
All in all, this insolvency outlook calls for more selectivity and preventive credit-management actions. It calls also for a close monitoring of trade disputes and other political and policy-related risks which will create a high level of volatility all along 2020.
Chart 2: Euler Hermes Global Insolvency Index and regional indices (yearly change in %)
Chart 3: Euler Hermes Insolvency Heat Map 2020
Chart 4: Euler Hermes Insolvency Indices by region (contribution to the yearly change in Euler Hermes Global Insolvency Index)
Asia will remain the key contributor to the global rise in insolvencies in 2020, with a +8% increase (after +17% in 2019). This would come from a continued rise in China and India, and a rebound in most of the other countries of the region, both emerging and more advanced ones. The region has also become a key contributor to the count of major insolvencies globally: In 2019, Asia accounted for one out of four insolvencies of major companies over the Q1-Q3 period, with noticeable cases in construction, agrifood, metals and chemicals. Asia also accounted for 17 out of the top 30 cases of major insolvencies, mainly due to China.
In China, we expect the rise in insolvencies to soften in 2020 (+10%) after a double-digit increase in 2019 (+20%1). The tempo has reduced following the surge of insolvencies posted in 2017-2018, which was partly driven by a stronger willingness by authorities to use the insolvency framework to clean the stock of ”zombie” state-owned enterprises. The forecast for 2020 reflects (i) the lagging effects of trade woes, notably for export-oriented sectors; (ii) the slowdown of China’s economic momentum, with GDP likely to grow by less than +6%, and overcapacities in some sectors such as the electric car industry and (iii) some inefficiencies in the transmission of monetary policy to Small and Medium Enterprises through smaller banks.
In India, business insolvencies should keep on increasing at a double-digit tempo (+11% in 2020, after +35% in 2019). Construction, business activities, trade and basic metals will be the hot spots. Two factors are at play: first, the gradually increasing use of the insolvency law that was newly established in 2016, and second, the less supportive economic outlook.
At the same time, and most often from low levels, we expect business insolvencies to see a moderate increase in Japan (from +1% in 2019 to +2% for 2020) and Australia (+2% both in 2019 and 2020), as well as in Taiwan (+2% in 2020) and Hong Kong (+9%), where political uncertainties will exacerbate corporates difficulties. Singapore, still too dependent to the global economy and Chinese growth, as well as vulnerable to trade tensions, will stand out, with another noticeable increase (+10%), albeit with a low number of extra cases (+ 5 insolvencies).
Chart 5: Euler Insolvencies in selected Asian countries (basis 100: year 2007)
After a decade of steady declines to a record low, with less than 22,200 cases in 2018, the number of insolvencies in the U.S. started to pick up in 2019. The resilience of the U.S. economy at a macro level, also visible in the job market, was not sufficient to prevent a slightly higher number of companies from filing for bankruptcy.
Part of this trend reversal comes from the surge in chapter 12, which is dedicated to farmers: the trade feud with China, with back and forth retaliatory tariffs on U.S. agricultural products and official calls to find other sources for soybeans, has definitely put farmers into trouble, compounding existing difficulties after several years of bad weather.
Yet, the rebound comes also from other sectors facing intense price competition, higher import costs and structural challenges due to digitalization/innovation, such as retail. To this regard, the U.S. continues to stand out by recording a significant number of insolvencies of major companies (46 cases over the first three quarters of 2019), in particular in the energy and retail sectors, and accounting for four out of the 10 largest global insolvencies over the same period.
In 2020, we expect the U.S. cycle of expansion to keep on slowing, remaining below potential, while companies most exposed to foreign demand will see only limited recovery from the global shock on trade. In this context, and considering also the business creation re-engaged in 2012, which is mechanically generating some insolvencies of young companies, we expect the U.S. to register another moderate increase in business insolvencies in 2020 (+4% to 23,800 cases, compared to +3% in 2019).
Meanwhile, Canada should see the confirmation of the trend reversal posted in 2019 (+5%) with another increase in 2020 (+5%), so that the North America Insolvency Index would show a pretty similar rebound in 2020 (+4%).
Chart 6 Major insolvencies (*) by sector and region in 2019 Q1-Q3 (in number)
At a regional level, we expect insolvencies in Latin America to keep on growing in 2020 (+13%) for the ninth consecutive year. However, this outcome would mask two opposite trends. On one hand, we expect a gradual decrease in insolvencies to finally take place in Brazil in 2020 (-3%), after more difficult than expected 2019 for corporates, partly because of the macroeconomic impact of the delay on pension reform (steady level of 2,700 cases in 2019, notably for SMEs and, in terms of sectors, services and retail).
On the other hand, we expect social protests, uncertain political environment and weaker business confidence to drive up insolvencies in other countries of the region: we foresee another steady increase in Chile (+21% anticipated in 2020), as well as in Colombia (+5%) where measures taken to accelerate the treatment of pending insolvencies already boosted insolvencies in 2019 (+34%).
Chart 7: Insolvencies in Latin America (basis 100: year 2007)
In 2019, Western Europe as a whole is likely to have posted the first increase in insolvencies since 2014. Yet this upward trend will be limited (+2%) since it reflects: (i) a set of countries still seeing a decrease over the year (France, Ireland, Portugal, Greece); (ii) an overall stabilization in Germany and Italy, despite a trend reversal in the second part of the year; (iii) a moderate increase in most of the other countries (+1% in Austria and Switzerland, +2% in Norway, +3% in the Netherlands, +5% in Sweden and Denmark) and ”only” three countries with a stronger pick up: Luxembourg, Belgium and the UK, on the road to post a +6% in 2019 after an already noticeable +10% rise in 2018.
2020 is set to see an extension of this regional upward trend. We foresee the global context to keep the pressure on prices and companies’ turnover. Indeed, European corporates should face (i) a limited economic dynamic for the second year in a row; (ii) prolonged headwinds for the industrial sectors, notably those most exposed to international trade and to the structural changes related in particular to digital innovation or green mobility issues – with the automotive sector in the front line and (iii) prolonged destocking and inventory issues in H1 2020. The pretty high number of major insolvencies, with 104 cases over the first three quarters of 2019, is an extra source of difficulties for impacted suppliers. At the same time, the rise in input costs and wages will limit margins and, despite supportive monetary policies, translate into additional woes for a higher number of companies – but from uneven starting point from one country to another.
After a decade of declines to record low levels, business insolvencies should see a +3% rebound to 19,950 cases in Germany, due the weaker economic outlook, in particular for the industrial sector and notably the supply chain of the automotive industry, while the country has already seen a noticeable increase in major insolvencies in 2019. In Italy, the lagging effects of political uncertainties and the persistently low growth dynamic will weigh on corporates and drive a +4% rebound after a flat 2019. In Spain, the trend reversal which started in mid-2019 is expected to continue in 2020, with a +5% rise reflecting the deceleration of the economy and the loss of competitiveness coming from higher labor costs. In the UK, we expect the election results of December 2019, with a solid Conservative majority, to lower (some of) the uncertainties, at least for the short term, and to increase economic growth. Yet, we anticipate the downside pressures on prices to prevail, given the need to resorb the post contingency stockpiling. This would support another increase (albeit slower) in insolvencies in 2020 (+3%). Belgium will continue with new records in the number of insolvencies (from +7% in 2019 to +2% in 2020) but part of the rise is due not to cyclical reasons but to a change in the law – now used for liberal profession insolvencies and also by the Courts to get rid of inactive companies and to limit certain forms of fraud. France should stand out with a stable number of insolvencies after four consecutive years of a steady decline (-18% since 2015 to 52,000). Yet, we expect this figure to mask uneven trends between sectors and types of companies, with another decline in insolvencies of individual companies but still prolonged difficulties for the largest firms, noticing that authorities have taken measures to support the companies most affected by strikes.
All in all, Western Europe would post a broader but more moderate increase in 2020 (+3%) compared to 2019. The regional insolvency index would remain well below its peak observed in 2013 (-32%).
At the same time, Central and Eastern Europe is also expected to register a moderate pick up in insolvencies in 2020 (+3%), with much less uneven trends than observed in 2019 across the countries of the region. In Russia, the improvement of the economy will be too gradual, with GDP expanding at +1.3%, to significantly improve the average situation of corporates and avoid another rise in insolvencies from +7% in 2019 – driven notably by the insolvencies in trade (+5%) business services (+10%), accommodation and food services (+16%) - to +2% in 2020. Poland should also keep an elevated number of insolvencies, slightly above the 2013 peak, given the structural problem of the profitability of Polish firms, which is exacerbated when economic growth is softer. The top increase in bankruptcies will be in Slovakia (+12%) but this where the changes in the insolvency law made in 2017 continue to boost the bankruptcies of sole proprietorships, which now represent more than 80% of the total number of bankruptcies.
Chart 8: Changes in business insolvencies by sector for selected European countries (2019 vs 2018, ytd figures available as of mid-December 2018, in %)