Begbies Traynor says that the UK is in the midst of a double-dip, or W shaped, recession comparable with that of the 1980s.

Begbies latest Red Flag report focussing on Q3 2009 contains the following headlines:

• Statistics from recessions over the past 40 years confirm that insolvencies peak between one and two years after GDP stops shrinking; scarce credit after this recession may intensify this effect, causing a substantial rise in insolvencies during 2010 and into 2011.
• The number of companies with significant and critical financial problems has fallen in absolute terms both year on year and quarter on quarter, principally reflecting the impact of HMRCs Business Payment Support Service, which has seen more than 215,000 companies defer payment of 3.79bn in tax liabilities.
• The fall in adverse actions against companies this quarter is, to some extent, symptomatic of increasing credit availability and growing business confidence, although adverse actions typically fall in this quarter as key sectors such as leisure enjoy their strongest quarter, and the holiday season both slows enforcement activity by creditors and eases cash flow pressures. This easing of corporate stress is reflected in the ICAEWs latest Business Confidence Monitor in which the Confidence Index has risen from -45.3 in Q1 to +4.8 in Q3, a level not seen since Q3 2007.
• Evidence is mounting that we maybe at the mid-point of a W shaped recession, with a deluge of business failures likely in 2010. Similarities can be drawn with the recession of the early 1980s which also saw a temporary rise in business confidence in 1981 before rapidly deteriorating in 1982.
• Sectors most impacted by adverse actions in Q3 2009 were Engineering and Recruitment, with Critical actions up 31% and 12% respectively on last year. Engineering companies form a large part of supply chains to major manufacturing operations and industrial projects, so they are most vulnerable in the current climate. The Recruitment sector is a victim of rising unemployment, which typically continues and peaks well after the end of GDP shrinkage

Red Flag Alert looks at information daily and compares detrimental data monthly, quarterly and annually, categorised as either Significant or Critical. The experience of Begbies Traynor is that a significant number of those companies with such financial problems tend to subsequently enter into a formal insolvency procedure within a year.

Ric Traynor, Executive Chairman of Begbies Traynor Group, said:

“The third quarter Red Flag Alert statistics demonstrate that the UK maybe in the eye of the storm. The well-intentioned government efforts to prop up struggling companies may provide a necessary lifeline in the short-term, but will ultimately prove futile in many cases. Both banks and trade creditors are also holding off wherever possible in the hope that business fortunes may improve, but Begbies Traynor supports the view of many leading economists that the UK is currently at the midpoint of a W shaped recession.

“Despite the recent UK stock market rally, private equity groups remain on the sidelines, with recently reported UK deals in the third quarter being at their lowest level for 25 years, a clear indication that they believe that the worst is not yet behind us.

“There is every reason to suggest that the unemployment and insolvency peaks of this recession remain some way off. Experience of the last four recessions tells us that unemployment levels and corporate and personal insolvencies are lagging indicators, and thus seem certain to rise in 2010.”

This article comes from Insolvency News, the leading news site for the insolvency profession. 

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