Zombie companies : There is a belief that as economies recover, (as pressure on working capital increases for example) more business will be forced into liquidation. This is a myth. There is a belief the fact that UK business failures are lower (in the current recession cycle) , it is a portend of more failures to come. This is also a myth.
The number of company liquidations increased in the second quarter 2013 to 3,978 from 3,601 in the first quarter and 4,064 in the second quarter last year.
We anticipate the number of liquidations in the current year will be 15,600 down from just over 16,000 last year.
Liquidations peak as the economy moves into recession. According to the larger scale business demographics data, the number of business “deaths” or de registrations surges in recession and the number of “births” or new registrations falls.
The rate of growth of the total stock of businesses falls as the economy slows. We anticipate the total volume of business stock will increase to 2.4 million by 2014 - 2015.
According to our research on the recession cycles :
Business Failures are a coincident indicator - as the economy falters the rate of failure increases, as the economy recovers the rate of failure slows.
In the 1980 cycle, as the economy recovered, the rate of business insolvency also increased, there was a positive correlation between growth and recovery.
In the 1990 cycle, insolvencies were inversely coincident with economic growth, as the economy slowed, failures increased but as the economy recovered, the rate of insolvencies fell.
In the 2008 cycle, insolvencies were inversely coincident with economic growth, as the economy slowed, failures increased but as the economy recovered in 2010 and 2011, the rate of insolvencies fell.
As the economy recovers in 2013, the rate of business failures will fall and not increase as many analysts predict.
The rate of business failure has been significant in the recession with the rate of business deaths increasing from an average 10% of total stock in the period 2000 - 2008 to 12% in 2009 and 13% in 2010. We estimate the rate of deaths in 2011 and 2012 to be 12%, significantly above trend rate
The net rate of business formation fell by almost -3% in 2010 compared to a net growth rate of +1.8% in the period 2000 - 2008.
For a copy of the full slide presentation : Download Zombie Companies Myth or Reality 2013 from the link below.
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