Global Insolvency Outlook; higher taxes for French corporates, German carmakers under pressure and understanding China’s big stimulus

Few German expressions have entered other languages, among them the term ‘Schadenfreude’ - a sentiment some German car manufacturers saw themselves confronted with at the emblematic Paris motor show this week – a pulse check of the automotive sector, notably in Germany; further topics in our What to Watch publication include an analysis of the latest policy measures undertaken by China to boost its slowing economy, and an impact assessment of the new corporate tax in France.

And time for stock-taking with our Global Insolvency Outlook which projects business bankruptcies to rise significantly this year, with a 9% increase so far, especially in construction, retail, and services; more specifically, the Global Insolvency Index is expected to grow by 11% in 2024, and continued increases in insolvencies are forecast through 2026; what this means for corporates but also for job markets in Europe and North America in our deep dive this week.

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Global Insolvency Outlook: The ebb and flow of the insolvency wave

Our in-depth analysis for you here.

All in all this year, we expect double-digit increases in bankruptcies for half of the world. Year-to-date, the number of business insolvencies worldwide has increased by +9% and the rise has been broad-based across geographies and sectors. Two-thirds of countries are expected to surpass their pre-pandemic insolvency numbers, notably the UK and France. Our Global Insolvency Index will increase by +11% in 2024, ending the year between 10 and 15% above its 2016-2019 average (but -11% below its level during the Great Financial Crisis). This catch-up comes from the clearing of the backlog of insolvencies, especially companies that were shielded from going belly up thanks to support measures implemented during the pandemic and the energy crisis. Construction, retail, and services have seen the strongest increases in business insolvencies in terms of frequency (the number of companies) and severity (the size of companies going bankrupt). In Q2 2024, large insolvencies (companies above EUR50mn turnover) reached a new record high, with Western Europe leading the trend, surpassing pre-pandemic levels as the manufacturing sector has barely started to exit one and a half years of recession.

Looking forward, slowing growth, persistent geopolitical frictions and a delayed easing of financing conditions would push up corporate insolvencies by +2% in 2025 before stabilizing at high levels in 2026. In the US, we expect bankruptcies to increase by +12% in 2025 (reaching a total of 27,800 companies) before falling by -4% in 2026. In Germany, business insolvencies will increase by +4% to 23,000 companies before falling also by -4% in 2026. In France and the UK, the number of insolvencies will decrease slightly by -6% for both countries in 2025 to 63,000 and 27,480 companies filing for insolvency, respectively, and continue to decrease further by -3% and -4% in 2026. Meanwhile in Italy, liquidations will continue to rise by +4% in 2025 (representing 9,700 cases) and +3% in 2026. In China, business insolvencies will start to increase from low levels by +5% to 6,850 companies, and +6% in 2025 and 2026, respectively.

In 2025, the further rise in business insolvencies will put over 1.6mn jobs at risk in Europe and North America alone. This is calculated based on the share of companies that go into a liquidation phase immediately (65% on average) and the share of people laid off in a restructuring phase (around 35%). The main sectors at risk are construction, retail, and services sectors. The jobs at risk are equivalent to close to 8% of the total number of people unemployed in Europe and the US and represent a 10-year high.

Lower interest rates are no silver bullet, likely to bring only moderate relief to corporates, with their positive impact at the highest level towards the end of 2025. We find the current easing cycle, which would end in September 2025 with a cumulative decrease in key rates close to -2pps, would lead to a -4pps reduction of insolvencies over the course of 2024-2026. This is particularly true in countries where companies have been protecting their margins; the same fall in rates comes with an up to +2pps improvement in margins for Germany, +4pps for France, +3pps for the UK and +2.8pps for the US, to name a few countries where we modelled the effect. Highly leveraged sectors such as household equipment, computers, auto and construction will benefit the most. But insolvency and non- payment risks will persist. Firms have already been deleveraging and adjusting to high rates, meaning the easing cycle may not fully address the financial challenges, only slightly offsetting the expected increase in failures in the US or barely reinforcing the expected decrease in France, for example. Moreover, there is still a significant share of corporate debt to mature in the next couple of years; about a third of lower-quality debt (i.e., high yield rated or unrated) is due to mature by 2026. Highly leveraged sectors will be increasingly distressed, keeping business insolvencies at high levels.

Our in-depth analysis for you here.

What to Watch this week

The complete set of stories for you here.

• France’s higher corporate taxes: The bark is worse than the bite. The French government’s new budget plan introduces a tiered corporate tax structure that raises the statutory corporate tax rate for businesses with turnovers exceeding EUR1bn. We expect earnings for large-cap companies (40% of CAC 40 companies are concerned) to reduce by only -2% in 2025 and -1.2% in 2026 as a result of the new tax regime (many of these companies are less exposed to France). Small- and mid-sized companies which generate more of their revenues locally are likely to face a larger hit: -3.5% in 2025 and -2.5% in 2026 for CAC Mid companies (5% of companies in scope) and -3.8% in 2025 and -4.4% in 2026 for CAC Small companies (5% of companies in scope). Overall, forecasts for earnings growth for CAC 40 companies remains robust, with EPS estimates likely to timidly adjust downward to 7% for 2025 and 8% for 2026, in line with our French equity market forecasts (6%).
• Paris motor show: Schadenfreude for German car makers. Global car sales are stalling, especially in Europe and Germany’s automotive sector is struggling the most. Major automakers have already reported sales declines between -3% to -13% for Q3 2024, highlighting the need to revisit the export-driven business model oriented towards traditional internal combustion engines. While electric vehicle sales (EV) were the silver lining everywhere else (+22% from January to September 2024 vs. Jan-Sept 2023), they fell by 32% in Germany over the same period. With the EU CO2 penalty looming, German automakers could face as much as EUR16bn in fines if they do not step up the pace of their EV transition.?
• China: Big move policies have yet to deliver. The Chinese economy is still in dire need of policy support. Q3 GDP data released today shows a slowdown to +4.6% y/y, from +4.7% in Q2, a far cry from the official growth target of “around +5%” for 2024, while consumer and activity data also confirm the gloomy outlook. The PBOC's super package boosted Chinese equity markets but improved economic fundamentals are yet to be seen. For this, fiscal policy needs to do the heavy lifting to break the negative confidence feedback loops, help stabilize real estate prices, sustainably restore confidence, and anchor long-term growth expectations. The yet-to-be-announced full scale of the fiscal stimulus, hopefully focusing further on consumers and the property market, would ensure China achieves the official growth target for 2024, and potentially boost 2025 growth by up to +0.4pp, though the long-term trend of economic slowdown cannot be avoided. ?

The complete set of stories for you here.