Over 70,000 construction firms on financial brink as recession looms

The Q3 Begbies Traynor ‘Red Flag Alert’ report has highlighted “serious concerns” with regard to the outlook for the construction, real estate and property services sectors, as critical financial distress jumps 46% and 38% respectively on Q2.

Tens of thousands of UK companies are in a critical financial situation as the pressure of higher interest rates, resilient inflation, and weaker consumer confidence take their toll.

These headwinds are increasingly widespread, particularly within the construction and property sectors, with over 70,000 construction firms and more than 51,000 real estate and property services firms in significant financial distress.

Almost 6,000 construction firms are in much more critical situations. 

With many UK companies accustomed to years of near-zero interest rates and access to government-backed Covid support loans, the new world of elevated interest rates will continue to push many businesses to the brink of failure.

Julie Palmer, partner at Begbies Traynor, said: "The construction industry, which has long been a bellwether for the health of the economy, looks particularly vulnerable with over 70,000 firms now in significant financial distress and circa 6,000 in much more serious critical financial distress — often a precursor to formal insolvency.   

"These businesses must now struggle through a period of inflation-eroded margins, weak demand, and a looming recession.

"It is likely to be an insurmountable task for many.  

"The debt storm, which has been brewing for years — but had been held off by several measures to provide breathing space for companies — may very well break.”

Ric Traynor, executive chairman at Begbies Traynor, commented: "I am hopeful that stabilising inflation and interest rates will start to slow the rising levels of distress in the economy in due course, but history dictates that this will take some time and insolvencies often peak long after a recovery has started.

"The ongoing geo-political uncertainty — which is particularly affecting commodity and energy prices, coupled with high interest rates, weak consumer demand, sticky levels of inflation, and an anticipated recession over the coming year — may simply prove too much for many of these distressed businesses.

"So, given the challenges the economy still faces, the outlook remains bleak, and I expect many more 'zombie' companies to continue to fail for some time to come as the impact of this economic backdrop makes them increasingly unviable.”

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