Business insolvencies represent an indicator which is often monitored to assess the severity of credit risk. They take two main forms: full liquidations accompanied by the cessation of activity, while a court administration order leads to a partial recovery plan.
In Western Europe the number of these insolvencies reduced significantly during the Covid period due to the fiscal and monetary support measures implemented at that time. The withdrawal of these support measures has resulted in a rebound. In Western Europe, on average in the last quarter of 2022 business insolvencies were close to the levels seen in the last quarter of 2019.
This statement conceals divergences, with countries where these insolvencies are higher than the pre-Covid level: the United Kingdom and Sweden, unlike the Eurozone countries.
There were common drivers to both United Kingdom and Sweden such as a steep growth deceleration from early 2022, inflation figures peaking in double-digit, and they started monetary tightening earlier. In these two countries both construction and retail and wholesale trade are deteriorating significantly. However, this deterioration is more unusual in retail and wholesale trade, as such a level of inflation has not been seen for 4 decades.
In the Eurozone, the more time passes the closer the level of insolvencies gets to pre-Covid levels. However, it is still lower, particularly due to a relatively recent deterioration in credit conditions, as evidenced by the ECB’s October 2022 survey on the distribution of bank lending in the Eurozone.
In France, this effect is contributing to a 12-months level of business insolvencies in the construction sector which is still around half of what it was on a yearly average between 2011 and 2015. This still favorable dynamic largely explains why total insolvencies have remained 8% lower than the pre-Covid level over the first two months of 2023. Conversely, retail trade has seen a sharper increase in insolvencies and is likely to return to pre-Covid levels in 2023.
Moreover, French companies appear to be suffering from a stronger severity risk of these insolvencies. Year-to-date in 2023, full liquidations represented some 74% of insolvencies, or 10 points more than a year ago, according to data from the clerks of commercial courts.
In conclusion, the rebound in the number of insolvencies is likely to continue in France and Western Europe, mainly due to the lower GDP growth in the Eurozone since the 4th quarter of 2022, as well as the continued monetary tightening by the central banks.
