Why are so many businesses going bankrupt? Global insolvency rise set to continue until 2026

Global business insolvencies have increased by 9% in 2024 so far, with “double-digit increases in bankruptcies for half of the world” expected by the end of the year.

That’s according to Allianz Trade, whose recent report makes grim reading for countries like the UK and France, where insolvency numbers are expected to pass their pre-pandemic levels and dramatically impact employment figures, with stabilisation not expected until 2026.

Here, William Hardwick explores the headline findings from the report before investigating why so many businesses are facing bankruptcy and what the next few years may have in store…

Headline findings from the global insolvency report

Larger organisations aren’t immune to insolvency, with a 23% increase in major insolvencies across Western Europe. This could have a knock-on effect by leading to non-payment for smaller suppliers, putting their own businesses at risk.

The combined turnover of companies undergoing insolvency processes rose from €72bn in the second half of 2023 to €96bn in the first half of 2024. The most severe cases were located in the US, which saw nine of the top 20 insolvencies. The electronics and commodities sectors suffered most severely.

Why are so many businesses going insolvent?

1. Many companies were previously protected from insolvency due to the financial measures implemented by governments during the COVID-19 pandemic and energy crisis (following the Russian invasion of Ukraine).
2. The majority of trade hasn’t finished adapting to the profound structural and societal changes brought about by the pandemic. The rise of eCommerce and changing nature of consumer shopping has put many retailers into bankruptcy.
3. Ongoing geopolitical uncertainty across the globe.
4. Inflation is continuing to squeeze sectors with high interest rates exacerbating borrowing costs and reducing consumer spending. 
5. The post-pandemic acceleration in new businesses being founded increase insolvencies as start-ups and younger firms are often at higher risk of financial difficulties.

Consequences of a rise in insolvencies

More insolvencies mean fewer jobs. Allianz Trade predicts that in Europe and North America, the number of jobs at risk is predicted to exceed 1.6m in 2024 and continue to increase in 2025, marking a ten-year high for both regions. The sectors that could be worst hit are construction, retail and services.

The rise in insolvencies could also result in more insolvency-related claims against directors and other connected parties for breaches of insolvency legislation and their duties. There’s a higher risk of fraudulent, dishonest or wrongful actions in the management of a business when it becomes financially distressed.

Lower interest rates offer hope

There’s hope that decreasing interest rates in major economies should support an improvement in the state of insolvencies. Following the Budget, the Bank of England is reported to be dropping the interest rate to 4.75%. This can lead to increased consumer spending and investment as borrowing becomes more affordable. If an upward trend occurs in spending and borrowing, this can in turn boost demand for goods and services — improving earnings and reducing the number of insolvencies. Real estate and construction services in particular should see a form of bounce-back, as lower interest rates stimulate the buying market with mortgages becoming more affordable. 

Lower borrowing costs will also reduce interest-based expenses for companies with outstanding debt, improving their income and cash positions. For those organisations that are highly leveraged, interest payments can constitute a significant portion of operating expenses and a decrease in interest rates can free up cash. This can then be put towards operational needs, investments or strengthening liquidity. 

However, Allianz Trade has warned against lower interest rates being seen as the ‘silver bullet’ for insolvencies. There’s still a significant share of corporate debt to mature in the next few years which may keep highly leveraged sectors increasingly distressed.

Impact of geopolitics on insolvencies

Whether or not inflation and interest rates decrease, the situation regarding insolvencies could change if, for example, the US economy performs worse than expected. As we’ve seen over the past decade, unforeseen events can cause national economies to deteriorate rapidly.

Ongoing conflicts in Russia-Ukraine and the Middle East, tensions in the South China Sea and Taiwan and ongoing uncertainties across European democracies could have a drastic effect on the direction and number of insolvencies, both globally and within the UK. 

For example, if global growth is 1.5% less than predicted, Allianz suggests that its insolvency forecasts would increase by an additional 7.5% globally. For 2025, this would mean 2,600 additional cases of insolvency in the US and 12,500 in Western Europe. 

The result of the US election — which has seen Donald Trump return as President — indicates a return to US protectionism. This could also escalate the insolvency forecasts predicted by Allianz, particularly in the case of a disruptive trade policy. A full-blown trade war with China — which is often touted by Trump — would increase Allianz’s US forecasts by an additional 4% and 2% in 2025 and 2026 and 0.5% and 1% in Asian countries. In theory, this could mean that the number of insolvencies in the US increases by 16% in 2025. 

The impact of Trump’s re-election on the UK economy could also be profound. The National Institute of Economic and Social Research (NIESR) stated that the protectionist measures planned by President Trump would result in weaker activity, rising inflation and higher interest rates from the Bank of England. This could lead to prices rising in the UK and forecasted growth being cut in half.

Increased insolvencies expected until 2026

While an earlier Allianz Trade report predicted a stabilisation in insolvency levels during 2025, this forecast has now been delayed to 2026. Continuing global geopolitical uncertainty and slow economic growth are among the main culprits, although the easing of monetary policies may ultimately improve cash flow for businesses. 

Talk to us

If you have any questions or concerns about how the growing rates of insolvencies could impact you or your business, our experts are on-hand to provide guidance in respect of personal insolvency, administrations, winding up, moratoriums, liquidation and advising on or defending claims brought by insolvency practitioner. 

Talk to us by giving us a call on 0333 004 4488, sending us an email at hello@brabners.com or completing our contact form below.