In its latest report, the United Kingdom-based think tank ‘The Centre for Economics and Business Research’ said that about 7,000 British businesses would likely fail every financial quarter in 2024 if high-interest rates are not controlled.
The think tank also said that the debt taken on during the COVID pandemic, higher borrowing costs and the cost-of-living crisis would drive an increasing number of businesses under stress, especially the ones in the retail and hospitality sectors.
“There were more than 6,700 business insolvencies in Britain in the second quarter of 2023, more than double in a typical quarter during the pandemic, when many businesses were largely protected from insolvency through a range of support measures. Insolvencies over the period were 50% higher than the same quarter pre-pandemic in 2019, and they averaged 4,100 on a quarterly basis between 2015 and 2019,” the study commented.
Battling the skyrocketing inflation, which currently stands below 8%, the Bank of England has raised interest rates 14 times since the 2021 end, from 0.1% to 5.25%, heaping pressure on indebted households and businesses.
‘The Centre for Economics and Business Research’ also predicted two more rate rises in the current cycle, with the Bank of England rate peaking at 5.75%.
“This means the worst is yet to come in terms of borrowing costs, quite apart from the impact of fixed term loans made when interest rates were lower being rolled over at the new higher rates”, the think tank stated further, while adding, “Looking ahead to the future, Cebr expects the rate of business insolvencies to remain high as interest rates continue to rise, pushing up debt repayments to unsustainable levels for some businesses.
“Our models suggest that there could be 7,000 insolvencies per quarter on average across 2024. Furthermore, Cebr is forecasting a recession in the UK, with two consecutive quarters of contraction in GDP in the fourth quarter of 2023 and first quarter of 2024,” the report observed.
The think tank also said that in case the British economy enters into a recession, the Bank of England would start cutting interest rates to stimulate demand.
The Bank of England has so far signalled about interest rates remaining higher for longer as it fights high inflation and keeps the ratio at or below the apex bank’s 2% target.
Meanwhile, the Chancellor of the Exchequer, Jeremy Hunt, has said the United Kingdom may experience a “blip” increase in inflation in September 2023, as data suggested that average fuel prices have jumped back above 1.50 pounds a litre.
Hunt also said that the Rishi Sunak government was on track to hit its target of halving inflation by the 2023 end but suggested the rate of price rises could spike when the latest figures for August are published in September.
PM Rishi Sunak has pledged to halve inflation to about 5%. However, prices have risen more during 2023 than expected by the Bank of England.
The petrol price rose by nearly 7% a litre in August 2023, while diesel jumped by 8%, according to the RAC, the roadside repair company.