Is the "insolvency paradox" nearing its end?
In contrast to the hopes of last year amidst the euphoria of the post-pandemic upturn, the macroeconomic outlook for 2023 is bleak, to say the least. Against this backdrop, should we expect a widespread rise in claims and corporate insolvencies? Jean-Christophe Caffet, Group Chief Economist, provides some answers.
How are economic opportunities changing for 2023?
The year 2022 ended on a particularly low note, a long way from the hopes of last year amidst the euphoria of the post-pandemic upturn. The macroeconomic prospects for 2023, by contrast, look gloomy to say the least. Most of the risks that were identified have been substantiated, raising concerns about another terrible year for the global economy, in particular for Europe, where the economy is already at a standstill while inflation is still reaching new heights.
The central banks, keen to avoid repeating the scenario of the 1970s, have embarked on a cycle of monetary tightening. This, they claim, will only come to an end when prices are more settled – though the macroeconomic toll might be a new recession.
Periods marked by tighter financial conditions – particularly when they are this big – almost always have an impact on claims. And especially if the episodes are combined with other factors that put a strain on the profitability of companies, as is the case today with the steep rise (or continuing high levels) in the price of inputs and commodities, particularly energy and possibly in the future, wages. The annual negotiations conducted against the backdrop of full employment and often double-digit inflation leave little room for doubt: wage costs will increase appreciably next year, with (of course) clear differences between countries and business sectors. In addition, interest charges will be noticeably higher and access to bank credit more restricted. At the same time, company cash-flows are ending the year in a much less favourable position than when it started – especially in the most energy-intensive areas of the manufacturing sector.
In these conditions, should we expect there to be an upsurge in corporate insolvencies?
The “paradox” of insolvencies resulting from the Covid-19 pandemic is set to disappear for two key reasons. The first relates to government intervention, which is under much more pressure now than two years ago due to the return of inflation and the conflicting objectives with monetary policy. While the budgetary support introduced during the pandemic amounted to over 10 GDP points in the most advanced economies, countries in Europe – with the exception of Germany – are now more cautious about spending. The measures for tackling the energy crisis (“tariff shields”, etc.) are around 3 GDP points. In other words, the “whatever the cost” approach adopted by governments is now clearly behind us. The second reason relates to the essential nature of the current crisis, which is diametrically different from the health crisis: the Covid 19 pandemic was more or less a temporary shock that extinguished almost all the variable costs borne by companies. The current crisis, on the other hand, is more of a permanent shock, leading to increased costs across the board that the state cannot bear in their entirety.
In these conditions, it is difficult not to anticipate a steep rise in corporate insolvencies over the next quarters. The normalisation process has also begun in many countries, such as France, where it is up by around 50% over the first ten months of the year – primarily in the transport, distribution and agri-food sectors. It would probably be an exaggeration to say there is a danger that there will be a spate of insolvencies and, a fortiori, a fully-fledged “tiddle wave”, as some commentators have speculated: first, the public authorities are keeping a close eye on the situation; and, secondly, the possibility of energy rationing seems to be receding in the very short term. Nevertheless, 2023 should signal a type of (re)convergence of micro and macroeconomics.
Read the full article in La lettre du Trésorier to get more forecast for 2023.