In a recent report titled ‘Global Insolvency Outlook: Reality Check’, global insurer Allianz projects a noteworthy trend in the landscape of business insolvencies.
The report indicated that after a surge in 2023, with business insolvencies rising by a remarkable 29 percent from the previous year’s 23 percent, the acceleration is expected to persist in 2024, albeit at a slower pace, before stabilizing at a high level in 2025.
The year 2023 witnessed the fastest momentum in business insolvencies since 2009, amidst the aftermath of the global financial crisis. Allianz highlighted that while the surge in insolvencies in 2023 was substantial, it does not anticipate a replication of the unprecedented wave seen post the 2008 financial crisis. However, advanced economies are expected to experience a significant catch-up in 2024.
Allianz’s central scenario forecasts a 9 percent year-on-year increase in business insolvencies for 2024. This surge is expected to be widespread, with most regions and four out of five countries witnessing rising numbers. Notably, countries like the US, Spain, and the Netherlands are projected to experience the largest increases, with figures reaching as high as 28 percent and 31 percent.
The report underscores that this broad-based rise would push a substantial proportion of countries above their pre-pandemic levels of insolvencies in 2024, compared to the previous year.
However, Allianz anticipates a somewhat stabilizing trend in 2025, with a majority of countries expected to witness a reversal in the insolvency trajectory. This reversal is estimated at a decline of 9 percent year-on-year on a simple average for the concerned countries.
European countries are expected to lead this trend of decline, primarily due to a strong bounce-back witnessed over the period of 2021-2024 and/or from historically high levels of insolvencies. The report emphasizes that the anticipated stabilization in 2025 reflects a gradual restoration of economic stability and resilience in the global business landscape.
High-Speed and Broad-Based Rebound in Business Insolvencies
Meanwhile, the report described 2023 as recording “a high-speed and broad-based rebound in business insolvencies,” but that this was expected, adding that 2024 started with insolvencies above pre-pandemic levels in most advanced economies.
“The number of business insolvencies rebounded in three out of four countries in 2023, with most recording a double-digit increase,” it stated in a review of last year’s figures.
It noted that while business insolvencies accelerated last year, there were exceptions in emerging markets, notably the BRICS – Brazil, Russia, India, China and South Africa.
“But they account for a noticeable share of global GDP (30%) and thus our global insolvency index (38%), lowering the annual increase of our headline indicator,” the report authors explained.
Regarding Allianz’s global insolvency index, the report stated that this increased by +7 percent for the full year of 2023, from +1 percent in 2022, noting that Western Europe was a key contributor to the global rise despite having a slower rebound of +15 percent year-on-year, with a stable momentum at the Eurozone level of +14 percent.
“North America also boosted the global rebound, with the US recording a major surge (+40% y/y), while the prolonged low number in China offset the increase in insolvencies observed in most other Asian countries (Japan, South Korea, Australia, Hong Kong, New Zealand).”
Allianz Global
The acceleration In 2024 and stabilisation at a high level in 2025 that the report predicts will be on the back of the projections that four out of five countries will see business insolvencies increase this year at +12 percent year-on-year on average.
The ‘Allianz Global Insolvency Outlook’ identified five main challenges that will make 2024 a year of reality checks for companies and economies around the world, particularly in Europe.
The First Reality Check
The first reality check, the report said, is that there is a looming profitability squeeze, noting that before benefiting from the global recovery in sight for 2025, firms will have to manage the deceleration in global demand that may affect them directly or indirectly.
“In several countries, the level of activity is unlikely to reach the minimum required to at least stabilise the number of insolvencies, with below-trend GDP growth in particular in the US (+1.4% in 2024), the Eurozone (+0.8%) and emerging markets, including China (+4.6%).”
Allianz Global
According to the report, going by long-term sensitivities, the Eurozone and the US would both need +0.7pp in additional GDP growth on average in 2024-2025 to stabilise their numbers of insolvencies, with both only gradually reducing the GDP gap compared to 2023, adding that weaker-for-longer demand is likely to result in increased competition, leading to reduced pricing power and declines in revenue growth, increasing the pressure on profitability at a time of still-high operating costs, with little relief from energy prices and recovering labour costs.
Elaborating on this looming profitability squeeze, the report cited recent earnings seasons that have already shown listed firms with comparative advantage, including in pricing power, starting to feel the pinch from waning demand and high production costs, as well as lingering supply chain pressure.
“This is notably the case for consumer durables, pharmaceuticals, paper, chemicals and metals. The latest market expectations also confirm the margin squeeze ahead: As of mid-February, analysts have revised down their estimates for earnings per share (EPS) for the full year 2024 by -0.7pp globally, with similar revisions for Europe (-0.7pp) and the US (-0.8pp).”
Allianz Global
Companies and economies will also be faced with the reality check of rising uncertainty, including from geopolitics to rising non-payment risk, the report noted.
Specifically, it mentioned that following a series of recent years of shocks, the packed election calendar in 2024 will add to economic uncertainty as countries that account for 60% of global GDP head to the polls.
This context will add a layer of complexity and risk to business operations by making it harder for firms to make accurate forecasts and business plans, and creating volatility in input costs, such as for raw materials, and FX, making it difficult for firms to effectively manage their supply chains and budgeting processes.
Allianz added that regulation, which is on a rise, may force firms to make costly additional efforts to comply, noting that its non-payment risk score reveals that firms are getting more and more concerned by non-payment.
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