In a significant shift, corporate bankruptcies are rapidly increasing in most developed economies. This rise is attributed to the receding pandemic-era support and increasing borrowing costs.
What Happened: As reported by the Financial Times on Monday, there has been a 30% upsurge in corporate insolvencies in the United States in the year leading up to September. This surge indicates a reversal in a trend of decline that lasted for a decade.
Germany, the largest economy in the European Union, witnessed a 25% increase in bankruptcies from January to September, compared to the same period in the previous year. Corporate insolvencies across the EU bloc rose by 13% year on year in the nine months leading to September, reaching an 8-year high, according to Eurostat data.
Chief Economist at Capital Economics, Neil Shearing, suggested that this trend could be due to the rise in interest rates, the fall of businesses that were dependent on government support during COVID-19, and the high cost of debt servicing. Notably, the transportation and hospitality industries have been severely affected.
During the pandemic, businesses stayed afloat due to extensive government support schemes. However, most of these have since been withdrawn.
Senior investment analyst at asset manager Hargreaves Lansdown, Susannah Streeter, said that while the rise was partly due to zombie companies folding, rapidly tightening monetary policy will further push startups and SMEs to shut shop.
Moreover, the German financial services company Allianz predicts that the global insolvency growth rates will reach 10% in 2024, after increasing to 6% in 2023.
Why It Matters: This upswing in corporate bankruptcies is a significant turning point in the economic recovery from the pandemic. The withdrawal of government support schemes and the rise in borrowing costs have exposed businesses to financial vulnerabilities. As these businesses struggle to refinance their debt at higher rates, the ripple effects could be felt throughout global economic activity and job growth.
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