The latest Begbies Traynor Red Flag Alert report into British corporate health says that 5,919 construction companies are now in ‘critical’ financial distress and 72,257 – 20% of the total – are in the only slightly less dire ‘significant’ financial distress.
The real estate and property services sector is in bad way too, with 4,994 companies in critical distress – a 38% increase between the second and third quarters of the year – and 51,240 in significant distress.
According to the Office for National Statistics, there were 353,365 firms in the construction sector in Great Britain in 2021. Discounting Northern Ireland, this suggests that 1.6% are critical financial distress, according to Begbies Traynor's data, and one in five are in significant financial distress.
Across the British economy as a whole, nearly 40,000 companies are deemed to be in critical financial distress as the pressure of interest rates, inflation and weaker consumer confidence take their toll. These pressures are now clearly being seen beyond consumer facing sectors and are becoming widespread, particularly within the construction sector, the report says, with many businesses being pushed to edge of failure.
The construction and real estate sectors now account for almost 30% of all companies in critical financial distress – defined as having county court judgments exceeding £5,000 against them – as the slowdown in the residential housing market continues to bite.
Begbies Traynor partner Julie Palmer said: "Tens of thousands of British companies are now in financial dire straits now that the era of cheap money is firmly behind us.
"Businesses that had loaded up on debt at rock-bottom rates, and were only able to cling on during the pandemic thanks to government support, must now deal with a financial reality check as higher interest rates hit working capital for the foreseeable future.
"Taken together with stubbornly high inflation and weak consumer confidence, many of these businesses will inevitably head towards failure.
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"The construction industry, which has long been a bellwether for the health of the economy, looks particularly vulnerable with over 70,000 firms now in significant financial distress and circa 6,000 in much more serious critical financial distress – often a precursor to formal insolvency.
"These businesses must now struggle through a period of inflation-eroded margins, weak demand and a looming recession. It is likely to be an insurmountable task for many.
"This latest data highlights how the debt storm, which has been brewing for years, but had been held off by several measures to provide breathing space for companies, may very well break. Something that will send shockwaves through the whole economy."
Executive chairman Ric Traynor added: "The current combination of macro-economic risks is piling on the pressure and really starting to take its toll on UK businesses, as evidenced by the latest research data from Red Flag Alert.
"I am hopeful that stabilising inflation and interest rates will start to slow the rising levels of distress in the economy in due course, but history dictates that this will take some time and insolvencies often peak long after a recovery has started. Unfortunately for many businesses, time is not on their side.
"The ongoing geo-political uncertainty, which is particularly affecting commodity and energy prices, coupled with high interest rates, weak consumer demand, sticky levels of inflation and an anticipated recession over the coming year, may simply prove too much for many of these distressed businesses.
"So, given the challenges the economy still faces, the outlook remains pretty bleak and I expect many more 'zombie' companies to continue to fail for some time to come as the impact of this economic backdrop makes them increasingly unviable."
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