Economic recovery hopes boosted by drop in failing firms

40% fall in companies in financial distress raises in second quarter, according to restructuring specialist Begbies Traynor

The number of companies in financial distress dropped sharply in the second quarter, in the latest sign of improvement in the wider economy.

Businesses in a "critical" condition fell 39% to 3,001 between April and June compared with the same period a year earlier, according to a report by restructuring specialist Begbies Traynor.

Julie Palmer, a partner at Begbies, said it was the "first real sign that the UK economy has turned a corner towards a sustained recovery".

She warned however the worst may yet be to come for so-called zombie businesses, which are smaller companies that have survived there cession but are chronically underfunded and do not have sufficient cash to take advantage of a recovery.

"We have real fears that many small and medium-sized enterprises will have serious financial difficulties at the time they least expect - during a recovery.

Construction industry saw a big drop in companies in financial distress. "Our experience has shown time and time again that many SMEs run out of cash during the recovery phase, as there is a real temptation to over trade," Palmer said.

The Begbies red flag report, which monitors early signs of financial distress among companies, said that businesses in critical distress also fell 9% in the second quarter compared with the first.

It added that distress levels fell most sharply in the construction, professional services, and financial services sectors, while manufacturing also improved on the back of increased demand both at home at abroad.

Separate data has supported the picture of a strengthening UK services sector, but manufacturing has performed below economists' expectations.

However, official figures to be published on 25 July are still expected to show that economic growth accelerated in the second quarter to about 0.6% from 0.3% in the first quarter.

Begbies Traynor said that businesses depending on discretionary consumer spending were among those to see some of the biggest rises in critical financial distress levels, including hotels, bars and restaurants.

"The consumer-facing industries continue to struggle as shoppers maintain tight control over their purse strings at a time when disposable income has remained under pressure," Palmer said.

Article Source : http://www.guardian.co.uk

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