Allianz Trade has released today its Global Insolvency Report and reviewed its forecasts of business insolvencies for 2023 and 2024.

According to the world’s leading trade credit insurer, after a small rebound in 2022 (+2%), global insolvencies are set to bounce by +21% in 2023 and +4% in 2024. In trying to explain the increase, Allianz said half of the countries are likely to exceed their pre-pandemic levels of insolvencies in 2023.

The report indicated that the rebound in business insolvencies is globally picking up speed. Allianz Trade’s Global Insolvency Index is set to continue rising in the next couple of years. Yet, this significant jump might not be sufficient for insolvencies to reach their 2019 levels, the report indicated. Moreover, according to Allianz Trade, global business insolvencies might stay -5% below their pre-pandemic levels in 2023 and -1% in 2024. This global trend masks significant local differences.

Allianz Trade forecasts that half of the countries in its panel are likely to see insolvencies exceed their pre-pandemic levels in 2023, and 3 out of 5 in 2024. In a nutshell, it said most countries are likely to exceed their 2019 levels by the end of 2024.

Maxime Lemerle, Lead Analyst for Insolvency Research at Allianz Trade, illustrated that the insolvency is more dominant in Europe than in America and Asia.

“Inside Europe, we expect the number of insolvencies to reach 59,000 in France in 2023 (+41% y/y), 28,500 in the UK (+16%), 17,800 in Germany (+22%), and 8,900 in Italy (+24%). In the US, we expect an increase of +49% in 2023 as a result of tighter credit conditions and an expected sharp economic slowdown, which would mean a return to 20,000+ insolvencies per year. In Asia, China should see a moderate increase (+4%) as the re-opening has not eliminated all risks, notably in the real estate sector.”
Maxime Lemerle

Beyond Lower Growth

Allianz Trade Insolvency Report noted that beyond lower growth, extended pressure on profitability, weaker cash buffers, and tighter-for-longer financial conditions are driving the insolvencies to rebound.

Explaining the rise in the number of businesses worldwide, Maxime Lemerle noted that the current muddle through the environment is the main reason behind Allianz Trade’s forecasts.

“We calculate that the Eurozone and the US would need respectively 1.3pp and 1.5pp of additional GDP growth in 2023-2024 for the level of insolvencies to stabilize. Additionally, companies will have to watch out for domino effects: the number of insolvencies for companies with more than EUR50mn in revenue is now slightly above pre-pandemic levels. Construction, retail, and services are the most affected sectors.”
Maxime Lemerle

Beyond lower growth, extended pressure on profitability, weaker cash buffers, and tighter-for-longer financial conditions are testing the resilience of the most fragile companies. This includes those with the least pricing power (e.g. specialized retail such as textiles, household appliances, and some services including restaurants); those that are the most exposed to a higher wage bill such as retail, transportation and construction; and those the most exposed to rising interest repayment costs (construction, durable goods).

The report noted that the recent disruptions experienced by the banking sector in Europe and in the U.S. are raising a legitimate question: what would be the impact of a credit crunch on business insolvencies?

Maxime Lemerle noted that according to his estimates, a financial crisis as that seen during the 2008 financial crisis would mean 21,600 additional insolvencies in the US over 2023 and 2024, and 99,900 in Western Europe.

“Even without a major financial crisis, a credit crunch of the magnitude seen in the early 2000s during the tech bubble burst would lead to 12,900 and 95,300 additional insolvencies over 2023 and 2024, respectively. And in case of a credit freeze that would stop new loans, insolvencies would increase by an additional 10,700 cases in the US and 46,300 cases in Europe.”
Maxime Lemerle