The global economy will still deteriorate in 2016, as corporate insolvencies are seen to rise by 2% worldwide, according to credit insurance firm Euler Hermes.
Euler Hermes cited that weak long-term growth, higher turbulence in sectors such as commodities, and the domino effect of major bankruptcies will lead to even more business bankruptcies, marking the first rise since the height of the global financial crisis in 2009.
The Asia Pacific region is foreseen to experience a bankruptcy increase of 13%, with Latin America even higher at 17%. The US’ bankruptcies are expected to increase by 3%, following six years of steady declines, signalling the impending end of the recovery phase.
Western Europe is the only global region where bankruptcies are expected to decline (by 5% in 2016 and 3% in 2017). However, the annual number of bankruptcies will still be more than pre-crisis levels in 11 out of 17 European countries, so it may not be cause to celebrate. Increasing non-payment risk from trade partners and political uncertainties may also dampen European firms’ outlook.
“The fact that insolvencies will rise this year after six consecutive decreases is yet another indicator that the state of the global economy is precarious,” said Ludovic Subran, chief economist at Euler Hermes.
“While we don’t anticipate a repeat of 2008, companies around the world, particularly those in emerging markets, should be aware that low growth and uneven liquidity may push to the edge companies whose working capital has eroded over the past few years.”
Declining global growth is said to be the primary cause of insolvency increase. In 2016, the world economy’s growth is expected to slow down to 2.5%. Emerging economies are expected to grow by only 3.6% in 2016, making it the slowest year since 2009. This has a negative impact on the revenue of large corporations.
Shakeups in the metal and energy sectors are also seen as a contributing factor to insolvencies. Low oil prices have led to ten energy companies in the US and six in the Canada to file for bankruptcy. Meanwhile, for metals, lack of government support has impacted the Chinese steel industry, as Sinosteel, worth US$26bn, went bankrupt in October 2015.