The global economy has yet to fully recover from the 2008 financial crisis. Despite this, Dun & Bradstreet sees a clear declining trend in corporate bankruptcies across the globe, according to its 2016 Global Bankruptcy Report.
The D&B study examines data from 32 countries between 2014 and July 2016. It finds that bankruptcy rates have declined significantly year-over-year in 20 of the 32 countries, and have stagnated in two. Ten countries have experienced clearly increasing bankruptcy rates.
To some extent, the financial crisis is responsible for the benign bankruptcy numbers. Monetary authorities across the world have lowered interest rates, in some cases to below zero. This has led to small borrowing costs for an exceptionally long time. The prevalent low-inflation environment signifies stable input costs for companies, as do low energy prices. Accordingly, corporate insolvencies have fallen against the background of mostly still-disappointing growth.
Positively, bankruptcies are decreasing in several of the world’s largest economies, most notably in the US, Japan, and Germany. In the US, unspectacular but consistent domestic demand, a solid job market, and low interest rates have supported companies. In Japan, low energy costs, low and declining borrowing costs, and banks’ willingness to reschedule loans have led to record-low failure rates. Germany’s bankruptcy rate is falling at a slower pace.
The outlook for these three major economies is mixed: In the US and Germany we expect to see a continuing fall in bankruptcy rates, but in Japan the outlook is deteriorating. Japanese exporters can expect the recent strength of the yen to hurt both their sales and their stock market value. Meanwhile, small and medium-sized companies report labor shortages, meaning that they may have to accept higher payroll costs in order to attract and retain workers.
Largely due to their exposure to China and commodities, countries in the Asia/Pacific region are overrepresented in the poorer performing category. Company failures in Australia, Hong Kong, Indonesia, Taiwan, and Vietnam are on the rise or flat-lining. Even in China, where data show declining bankruptcy rates over the last year, the trend appears to have reversed in the last six months. Company failures in the country are up by more than a quarter in year-over-year terms, pointing to a sharp increase from February to July 2016.
Turning to Europe, the most positive credit development in the last year is the improved outlook for southern EU countries. Company failures in both Spain and Italy are clearly trending downwards after several years of increases.
Meanwhile, high-frequency data in the UK suggest the country will avoid a recession, although it is still too early to assess the full economic and political impact of the UK’s Brexit vote. Germany, which has close trade links with the UK, was able to withstand the Brexit fallout relatively unscathed, and the postvote leading indicators are encouraging. Brexit concerns are more long-term. Our core scenario is that the UK and the EU will eventually reach some form of agreement regarding market access and freedom of movement that is beneficial for both.
Dun & Bradstreet forecasts world GDP expansion to slow to 2.2% in 2016, down from 2015’s already sluggish pace of 2.5%. We expect US and Chinese growth to decelerate in 2016, to 1.6% and 6.4%, respectively, and for Brazil’s and Russia’s economies to keep contracting. The EU as a whole is still ailing; moreover, it faces an uncertain political future given the UK’s decision to exit. Existing growth hot spots, such as the Philippines and EU member states in Eastern Europe, are too small to have a noticeable impact on global growth. Thus, troublingly for international companies, we believe the risks associated with doing cross-border business in the global economy still remain elevated despite the decline in overall bankruptcies.
Oana Aristide is a Senior Economist on D&B’s Global Data, Insight and Analytics team. Based in the UK, she covers three Scandinavian countries as well as Romania, Japan, Malaysia, and the Philippines as a contributor to D&B’s Macro Market/Country Insight Products. She has a background in central banking.