The pressure on British companies will not ease anytime soon

The British economy is facing an encouraging fact: the number of companies that went bankrupt last year was the highest in thirty years.

According to government data published this week, more than 25,000 businesses will be registered as insolvent in 2023, the highest number since 1993. As pandemic-related business support measures have ended, the fallout from years of high debt and interest rates, rising prices and a cost-of-living crisis more apparent. Insolvencies have spread from small to larger companies, analysts said.

Companies still dealing with relatively high costs, demands for higher wages, supply chain uncertainties and wavering consumer confidence are hoping for better economic times. Slower inflation, stronger growth and interest rate cuts are expected this year, but not anytime soon.

On Thursday, the Bank of England kept interest rates at 5.25 percent, the highest level since 2008, and where they have remained since August, after rising from just above zero in a series of increases over a year and a half.

Policymakers said inflation had eased, including wage growth and services inflation, but some persistence measures remained “elevated.” Two members of the nine-member rate-setting committee voted for a quarter-point interest rate increase, while one voted for a rate cut for the first time.

There is good news on inflation, “but we need to have more confidence that inflation will fall all the way back to the 2 percent target and stay there,” Andrew Bailey, the bank's governor, said Thursday. “We are not yet at a point where we can lower interest rates.”

Inflation in Britain has fallen significantly from a peak above 11 percent at the end of 2022 to 4 percent in December. Some economists expect inflation to slow to 2 percent in the spring. But concerns about whether inflation will remain at low levels mean investors expect the Bank of England to be slower in cutting rates than the US Federal Reserve and European Central Bank.

The bank said it expected inflation to fall below its target in the second quarter before rising again in the second half of the year. The inflation rate would end the year at around 2.7 percent and remain there until 2025, only to fall below target again the following year.

The bank predicted that the economy would continue its stagnation from the second and third quarters of 2023 until the end of the year. The economy is expected to grow just 0.25 percent in 2024 before accelerating slightly in 2025.

The effect of high interest rates is still rippling through the economy. Businesses taking out loans will face higher financing costs, while households will face larger monthly payments than a few years ago due to refinancing their mortgages.

According to consultancy EY-Parthenon, higher interest rates were one of the reasons for an above-average number of profit warnings from listed companies last year. Contract delays and cancellations, higher overhead costs and weak consumer confidence were also factors.

Last year, retail and hospitality businesses were hit particularly hard by bankruptcies, and 97 percent of those businesses were small businesses with a turnover of less than 1 million pounds ($1.27 million), according to PwC.

Jeff Cansdale closed his fish and chip shop in Reading, a town west of London, last week after seven years in business. Initially, business wasn't that bad during the pandemic because Mr. Cansdale offered takeout and was able to stay open, he said. The shop, a traditional 'chippy', also served a few specials such as vegan fish and Poutine, the Canadian dish with fries, cheese curds and gravy.

But one government-funded discount intended to encourage people to eat at restaurants, hurt his business. Mr Cansdale backtracked, Russia invaded Ukraine and the store's essential costs – fish, oil and energy – skyrocketed. As inflation put pressure on family budgets, his regular customers came much less often and ordered less. Profits fell and did not recover.

“Over time it just became unprofitable,” Mr Cansdale said. “It meant I started racking up debt that the company wouldn't be able to pay off.”

Economists at Oxford Economics say the rise in bankruptcies in many advanced economies, including Canada and the United States, was largely a result of lower bankruptcies during the pandemic. But, they said in a research note this week, it was not “a reason to panic” because many of the companies that failed were small and so their problems would not lead to a rise in unemployment or pose a risk to the overall financial stability.

Yet there is concern. On Thursday, the British government said it was “reaffirming” its support for small businesses by updating information on the help they could receive and setting up a business council to speak directly to government officials.

The owners of Fidget & Bob, a café and deli in Reading, are concerned about the number of businesses closing in the city. At least six delicatessens, bars and other catering establishments have already closed this year.

And small, mostly independent, businesses give the city personality, he said Shuet Han Tsui, co-owner of Fidget & Bob. “Reading doesn't have enough of those locations to lose a handful in such a short period of time.”

Ms. Han Tsui and her co-owner, Breege Brennan, say business is going well, but they are doing their best to keep costs down. They have shortened their hours and are encouraging customers to order in advance. Even saving 5 to 10 percent of the time it takes to place an order helps, Ms. Han Tsui said. To attract more customers, they are bringing in products that used to supply local stores that recently closed.

“We just have to wait for 2024 and hope that 2025 brings something better,” she said.