New data suggests the UK economy is facing a worrying “pincer movement” due to the coronavirus pandemic, with a surge in limited companies going bust being mirrored by a drop in new firms setting up.
The analysis by the Enterprise Research Centre shows that 61,472 limited companies folded between the start of March and mid-April, with a parallel drop in the numbers of new firms registering with Companies House.
Comparing figures from March this year with the full month’s data from last March, the number of firms going out of business was 70% higher than a year ago (up 21,206), while the number of new firms incorporated fell by 23% (14,270 fewer).
It suggests the UK economy is losing existing firms at a faster pace than in recent years as well as seeing a big drop-off in new starts deterred by the uncertain outlook.
London saw the biggest absolute rise in numbers of company dissolutions in March, up by 6,431 compared to a year earlier, followed by the West Midlands (2,685), the North West (2,440) and the South East (2,357). The largest percentage rise was in Wales (up 140%).
There were notable variations observed among sectors. While all sectors saw a rise in the number of dissolutions, transport was hardest hit with nearly three times more firms ceasing to trade (194%). Real estate, wholesalers and information services also saw marked increases compared to March 2019.
Newer companies have borne the brunt of the collapse in economic activity, with 46% of dissolving firms being less than three years old.
The ERC researchers analysed data from the FAME database, which contains information on UK companies registered at Companies House, including approximately two million active firms.
They said that while coronavirus is likely to be a major factor in both the rise in company dissolutions and fall in new incorporations, it was important to note that winding down a limited company could take months, owing to the need ordinarily for 75% of shareholders by value to agree. The latest data therefore needed to be seen in the context of an economy that had already seen dampened growth from Brexit uncertainty.
The ERC is the UK’s leading independent research institute on growth, productivity and innovation in small and medium-sized enterprises (SMEs).
Mark Hart, Deputy Director of the Enterprise Research Centre and Professor of Entrepreneurship at Aston Business School, said:
“These stark figures clearly show a significant rise in the number of company dissolutions and a parallel fall in new firm incorporations in a time period that coincides with the arrival of COVID-19 in the UK.
“They suggest our economy is facing a pincer movement of sharply higher business closures and a concurrent lack of new businesses starting due to an understandable fear about what the future holds.
“The Chancellor has unveiled a substantive package of support for UK firms, but we know that many are struggling to access this assistance. If those shortcomings aren’t remedied fast, we’d expect to continue seeing a long, slow decline among the private-sector firms that support millions of jobs across the economy.
“In that context, rather than seeing a V-shaped rebound as some economists have predicted, we could instead see an L-shape dragged down by a net loss of companies over a long period.”