The Squeeze on British Businesses Is Not Letting Up Soon

Britain’s economy faces a bracing fact: The number of companies that folded last year was the highest in three decades.

More than 25,000 companies registered as insolvent in 2023, the most since 1993, according to government data published this week. As pandemic-related support measures for businesses ended, the wreckage from years of high debt and interest rates, soaring prices and a cost-of-living crisis become clearer. Insolvencies have spread from small to larger businesses, analysts said.

Businesses still dealing with relatively high costs, demands for higher wages, supply chain uncertainties and wavering consumer confidence are hoping for brighter economic times. Slower inflation, stronger growth and cuts to interest rates are expected to come this year, but not soon.

On Thursday, the Bank of England held interest rates at 5.25 percent, the highest since 2008, and where they have remained since August, after rising from just above zero in a series of increases over a year and a half.

Policymakers said inflation had declined, including wage growth and services inflation, but some measures of persistence remained “elevated.” Two members of the nine-person rate-setting committee voted for a quarter-point rate increase, while one voted for the first time to cut rates.

There has been good news on inflation, “but we have to be more confident that inflation will fall all the way back to the 2 percent target and stay there,” Andrew Bailey, the governor of the bank, said on Thursday. “We are not yet at a point where we can lower interest rates.”

Inflation in Britain has dropped notably from its peak above 11 percent in late 2022 to 4 percent in December. Some economists expect inflation to slow to 2 percent in the spring. But concerns about whether inflation will stay at low levels mean investors are expecting the Bank of England to be slower to cut interest rates than the U.S. Federal Reserve and the European Central Bank.

The bank said it expected inflation to fall below its target in the second quarter before rising again in the later half of the year. The inflation rate would end the year around 2.7 percent and stay there through 2025, not falling to target again until the following year.

The bank forecast the economy would continue the stagnation of the second and third quarters of 2023, into the end of the year. The economy would grow only 0.25 percent in 2024, before accelerating a little in 2025.

High interest rates are still working their way through the economy. About 30 percent of the effect of past interest rate increases has not yet passed through to businesses and households, the central bank estimated. That means businesses taking out loans will bear higher financing costs, while households due to refinance their mortgages face larger monthly payments than they would have a couple of years ago.

Higher interest rates were one of the reasons for an above-average number of profit warnings from public companies last year, according to EY-Parthenon, a consultancy. Contract delays and cancellations, increased overhead costs and weak consumer confidence were also factors.

Last year, insolvencies hit retail and hospitality companies particularly hard, and 97 percent of those companies were small businesses with revenue of less than 1 million pounds ($1.27 million), PwC said.

Jeff Cansdale closed down his fish and chip shop in Reading, a town west of London, last week after seven years in business. Initially, business wasn’t too bad in the pandemic because Mr. Cansdale offered takeout and could stay open, he said. The shop, a traditional “chippy,” also served a few specials like vegan fish and Poutine, the Canadian dish of fries, cheese curds and gravy.

But a government-funded discount meant to encourage people to eat in restaurants hurt his business. Mr. Cansdale bounced back from that, Russia invaded Ukraine, and the shop’s essential costs — fish, oil and energy — skyrocketed. As inflation squeezed household budgets, his regular customers came much less frequently and ordered less. Profits took a dive and didn’t recover.

“Over time it just became unprofitable,” Mr. Cansdale said. “It meant that I was starting to accrue debts that the business wasn’t going to be able to pay off.”

Economists at Oxford Economics said the jump in bankruptcies in many advanced economies, including Canada and the United States, was largely a result of lower levels of insolvencies during the pandemic. But, they said in a research note this week, it was not “cause for panic” because many of the businesses going bust were small, so their troubles would not lead to a surge in unemployment or a risk to general financial stability.

Still, there is concern. On Thursday, the British government said it was “reaffirming” its support for small businesses by updating information on aid they could receive and creating a business council to talk directly with government officials.

The owners of Fidget & Bob, a cafe and deli in Reading, are troubled by the number of businesses closing in the town. At least half a dozen delis, bars and other hospitality venues have closed already this year.

And small, mostly independent, businesses are what give the town personality, said Shuet Han Tsui, a co-owner of Fidget & Bob. “Reading doesn’t have enough of those venues to be able to lose a handful” in such a short span.

Ms. Han Tsui and her co-owner, Breege Brennan, said their business is OK, but they are trying hard to keep costs down. They have shortened their opening hours and encourage customers to order in advance. Even shaving off 5 or 10 percent of the time it takes to make an order helps, Ms. Han Tsui said. To attract more customers, they are bringing in produce that used to supply local stores that have recently closed.

“We just need to see out 2024 and hope 2025 brings something brighter,” she said.