Allianz Trade Analysis - A pragmatic approach to global insolvencies in 2024

As expected, 2023 recorded a high-speed rebound in insolvencies in three out of four countries (55% of global GDP). Data from Q4 show that the upside trend accelerated at the end of the year in most countries, with significant jumps in the Americas (+54% y/y and +35% y/y in North America and Latin America, respectively) and in Asia (+67% in South Korea, +47% in Australia and +35% in Japan). Globally, average insolvency growth accelerated from +23% in 2022 to +29% in 2023, with the fastest growth in 2009 (+33%). This rebound was largely expected as the number of insolvencies seen in 2020 and 2022 was artificially reduced by the massive state support provided to firms during the Covid-19 crisis and then following the shockwaves of the war in Ukraine.

A quick comparison with 2016-2019 levels shows that, between 2020 and 2022, support measures spared the equivalent of three-quarters of insolvencies in countries such as the US, Germany, Austria, Norway, Portugal and New Zealand, and the equivalent of one year of insolvencies usually reported in Australia, the Netherlands, France, Ireland and Italy.

Western Europe remained a key contributor to the global rise despite a slower recovery (+15). North America also boosted the global recovery, with the US recording a major increase (+47% y/y), while China offset the growth in insolvencies seen in most other Asian countries (Japan, South Korea, Australia, Hong Kong, New Zealand). Exceptions are companies mainly in emerging markets, including Brazil, Russia, China, South Africa and Turkey, as well as some countries in Central Europe (Bulgaria, Czech Republic and Latvia) and Asia (Singapore, Taiwan). Allianz Trade analysts expect India to be part of this list, although figures for 2023 are not yet available. In these countries, the annual decline in insolvencies ranged from -7% in Singapore to -41% in Turkey.

Looking ahead, before an expected flattening of insolvencies in 2025, analysts anticipate a further acceleration of insolvencies worldwide in 2024, with a 9% year-on-year increase. Four out of five countries will see a +12% year-on-year increase this year, with the most in the US (+28%), Spain (+28%) and the Netherlands (+31%). However, in 2025, analysts forecast a stabilisation of the global insolvency index, with most countries seeing a reversal of the trend.

Before the possible global recovery that is expected in 2025, firms need to manage the decelerating demand. The US, euro area and emerging markets, including China, will face slow GDP growth, which will increase pressure on profitability at a time when costs are still high due to energy prices, rising wages and persistent supply chain pressures (e.g. Red Sea, Panama Canal). In addition, after a series of shocks, the 2024 election calendar will increase economic uncertainty as countries accounting for 60% of global GDP head to the polls soon. This context will add a level of complexity and risk to operations, making it difficult for firms to develop accurate forecasts and business plans. Thus, volatility in raw material costs is expected, making it difficult to manage supply chains and budgeting processes effectively.

Allianz Trade analysts have identified five main challenges – which will characterise 2024 as a pragmatic year for companies and the economy, especially in Europe – such as: reduced profitability, increased uncertainty, reduced refinancing and liquidity conditions, increased insolvencies and higher risks to jobs.

Last year in Europe, company insolvencies exceeded pre-pandemic levels in two out of five sectors. 23 countries in the Allianz Trade study recorded a 66% increase in insolvencies across all sectors (i.e. 121 out of 184 sectors) in construction, transport and warehousing, information and communications. However, the first two sectors stand out with a strong recovery, well above pre-pandemic levels in several countries, along with accommodation and food services.

Retail in Western Europe, construction in Asia and services in the US recorded the largest increases in insolvencies. In Q4 2023, the number reached a high level (92), slightly above the pre-pandemic average (7 cases compared to the 2017-2019 average). The year 2023 ended with a significant rebound in the number of insolvencies, which reached 365 cases, up from 270 in 2022 (an increase of around +35%). However, in 2023, the turnover of insolvent companies remained almost stable at €175 billion, down 2% from €179 billion.

In Germany, insolvencies will continue to rise by 13% in 2024. Analysts expect that this year the already struggling economy will emerge from recession and structural challenges related to Germany’s broader economic model, against a backdrop of tightening financing conditions, will put more companies in financial difficulty, with the number of insolvencies reaching 20,260 cases (+13% year-on-year) before achieving a somewhat stable level in 2025 (19,860 cases) as the economy recovers.

In France, the number of insolvencies last year was around 56,700 cases, above pre-pandemic levels, and seven sectors such as transport/warehousing, information/communication, retail, hospitality/restaurants exceeded historical highs. In 2024, France could exceed the 60,000 insolvency threshold, given the slow recovery of the economy and prolonged constraints on the financing side.

After ending 2023, and reaching a 50-quarter record for corporate insolvencies (7,620 cases in Q4), the UK is about to see growth continue in 2024 (+10%), with 31,000 insolvencies. As a result of successive challenges (Brexit issues, Covid-19, monetary tightening and rapid inflation), firms will continue to struggle as the economic outlook for 2024 remains weak.

In Italy, the upward trend reversal, which generated an acceleration in the quarterly number of insolvencies from +4% in Q1 to +31% in Q4, was spread across all sectors and had a significant contribution from trade (23% of the full year result), manufacturing (17%), construction (16%) and hospitality (10%).

Benelux, Belgium and the Netherlands will see a further increase in insolvencies in 2024 (+6% year-on-year and +31% respectively). So far, Spain has continued to stand out as an exception compared to other European countries. This year, analysts expect a one-off rebound in insolvencies (+28%) before a projected decline in 2025 (-11%).

For Romania, somewhat surprisingly, the number of insolvencies remained stable in 2023, but the trend in the last quarter, which recorded a +10% increase, is not a coincidence. With a slower-growing economy amid inflation that keeps Romania among the top countries in the European Union and with interest rates on the rise, Allianz Trade forecasts a +5% growth that corresponds to a normal scenario in 2024. The estimated number of 7,000 insolvencies this year is not small compared to larger and more developed economies such as Italy or Spain, where the number of estimated insolvencies does not exceed 10,000 and 6,000 respectively. In recent years, wholesale and retail trade has been in first place with a share of 27%, followed by the construction sector, which remains constant at 20%, and manufacturing at 12%.

“The fact that we don’t yet have many big names in terms of size of turnover in the insolvency situation reported in the last two years is at first sight a positive thing, because of the potential negative impact on many companies in the sector to which such entities belong. At the same time, late payments to suppliers have increased significantly in the last year, increasing the number of companies that, although they have not declared insolvency, are in a state of quasi-financial insolvency due to the difficulties they have in covering their debts to banks, suppliers and creditors in general.”, says Mihiai Chipirliu CFA – Risk Director, Allianz Trade.

In terms of segment structure, the lack of large new residential projects coupled with delays in payments to suppliers by state institutions is expected to maintain high insolvency pressure in the construction sector. The approaching election campaigns could bring new flows into the infrastructure segment although sustainability could be reduced.

Delays on the part of State beneficiaries are felt several times a year and in much stronger areas of demand. The timing of such delays (usually at the end of the month/quarter/year) has to be understood in relation to the two vulnerabilities: the revenue collection to the State Budget and the difficulty of managing the budget deficit.

Firms are expected to continue to face costly financing, and maintain concerns about their ability to absorb borrowing costs and alleviate pressure on overall profitability. At the same time, the limited availability of funding will put exposed sectors and firms in the UK (15%), France (14%), Italy (9%) and Germany (7%) at risk, with start-ups facing their first real test of resilience.

Accelerating post-pandemic construction will increase the number of company insolvencies in 2024. In Europe, for example, registration demand for new companies is projected to be +14% higher in 2021-2023 compared to 2016-2019. For start-ups, this will be the first stress test, especially France (+47%), the Netherlands (+28%) and Belgium (+14%). In addition, sectors to watch in this include information/communication (+32%), transport/warehousing (+28%) and real estate/B2B services (+24%).