This week, we published our Global Insolvency Outlook 2023-25. Insolvencies are normalizing in 2023 but we expect an acceleration in 2024 before stabilizing in 2025. Further topics to watch this week are ECB′s monetary policy, the EU Mercosur trade deal, Chinese equities and the elections in Argentina and Poland.
Business insolvencies are normalizing at a high speed but we expect them to further accelerate in 2024 (+10% y/y from +6% in 2023), compared to +4% expected previously, before somewhat stabilizing with a limited improvement in 2025 (-2%). This global outcome would result from a broad-based dynamic. In 2024, a large majority of countries (four out of five) would contribute to the upside trend, pushing three out of five of them above their pre-pandemic number of insolvencies. The main takeaways:
- Most countries are seeing double-digit rebounds in business insolvencies as excess cash dwindles, leaving the most vulnerable corporates caught between a rock and a hard place in 2023. While excess cash remained high in the first half of 2023 (EUR3.4trn in the Eurozone and USD2.5trn in the US), it is still highly concentrated among large firms and specific sectors (tech, consumer discretionary). At the same time, net cash positions are dropping faster than economic activity. In this context, 11 countries are already seeing a more than +30% increase in business insolvencies:? the US and Canada in the Americas; the Netherlands, Sweden and France in Western Europe; Poland and Hungary in Eastern Europe and Japan, Australia, New Zealand and South Korea in Asia. Besides hospitality, transportation and wholesale/retail, other sectors are catching up fast, in particular construction, where backlogs of work have been almost completed – especially in the residential segment.
- The ongoing profitability squeeze will challenge corporate liquidity and solvency, while financing is set to remain costlier and less available. The recession in corporate revenues is gaining traction amid lower pricing power and weaker global demand. As a result, corporates’ liquidity positions are worsening fast and prospects are not likely to improve before 2025. At the same time, we also expect persistent elevated operating costs, with minimal relief from energy prices and a prolonged recovery in labor costs taking over from decelerating input costs. To add to this, higher-for-longer interest rates are deteriorating the solvency profile of several sectors, with real estate and durable goods, as well as those exposed to structurally high Working Capital Requirements (machinery and transport equipment, pharmaceuticals, electronics, construction) at the forefront. Payment terms are also likely to be an increasing drag in the coming quarters: Global Days Sales Outstanding (DSO) already stand above 60 days in 47% of firms. One additional day of payment delay is equivalent to USD100bn in the US, USD90bn in the EU and USD140bn in China.
- Despite the looming deterioration in payment terms, we do not expect any significant changes in insolvency frameworks in the coming two years that would help fend off rising business insolvencies. Changes in insolvency frameworks to limit an increase in business insolvencies (i.e. ‘early identifications’ of debt distress; ‘early restructuring’ via for instance out-of-court proceedings) have already been partially implemented in several large economies, such as the UK, France, Italy, South Korea, Japan, Singapore, Hong Kong and China. As it stands, there are no further discussions on strengthening these measures in the coming years as the focus is more on increasing tax receipts through measures such as e-invoicing, for example. The contraction in bank credit and lower profitability, is pushing B2B payment terms higher, thus increasing the role of the invisible bank. This is critical for critical for fragile firms, notably SMEs. We estimate that 15% of SMEs in the UK, 14% in France, 9% in Italy and 7% in Germany remain at risk to default in the coming four years because of weak fundamentals.
- We expect a back-to-back acceleration in global business insolvencies (+6% in 2023 and +10% in 2024). Three out of five countries will reach pre-pandemic business insolvency levels by the end of 2024, including large markets such as the US and Germany. The US (+22%), Italy (+24%) and the Netherlands (+28%) are set to record the largest increases in 2024. Growth figures would need to double to stabilize insolvency figures on both sides of the Atlantic, which will not occur before 2025 (-2% fall in global business insolvencies expected).
The comprehensive report for you here.
- ECB's turning point – after ten hikes it is finally time to stop. We expect the ECB to refrain from further tightening at its next meeting on 26 October, with the deposit rate remaining at 4.0% due to an uncertain economic outlook and more restrictive financial conditions. Discussions may touch on an acceleration of quantitative tightening and an increase in minimum reserves, but significant changes are unlikely at this point, given increased fragmentation risks.
- Mercosur and the EU – finally closing the deal or breaking up? EU and Mercosur negotiators are working towards finalizing a trade deal that has been in the making for 20 years, but environmental concerns pose a challenge. A rough estimate shows that both regions can benefit from the agreement (USD5.1bn USD3.9bn in additional annual export gains for Mercosur and the EU, respectively). Brazil is likely to gain the most, with estimated additional exports of USD4.2bn per year.
- Argentine elections – dollarization won't save the day. The political frontrunner, Javier Milei, for this week’s presidential election has advocated a full dollarization of the economy. Albeit being a good political pitch, the reality check is that its implementation alone is no insurance against further crises. An orthodox policy mix would be more efficient and less costly, but the political will is still lacking.
- Poland elections – winds of change. Three pro-EU opposition parties from center-left to center-right, which have pledged to end the eight-year tenure of the PiS government, won a majority of parliamentary seats in the general elections last Sunday. A change of government is likely, providing the opportunity to unlock EU funds of up to 14% of GDP over 2024-2027, which would boost investment and growth.
- Chinese equities – big potential hindered by geopolitics.? Although both macro and microeconomic analyses indicate an attractive picture for Chinese equities with over 10% upside potential to return to fundamentals, geopolitical risks, a deteriorating business climate and a strong USD discourage foreign investment.
The complete stories for you here.