On 1st November, the Daily Telegraph published an article with the headline “Half a million firms in significant distress ahead of rate rise decision”.  Then 5 days later, after the first interest rate rise in a decade, it published another article headlined “UK businesses are flourishing despite Brexit uncertainty.”  So which is to be believed?  What is the true state of our markets and the businesses trying to succeed in these politically uncertain times?

Recent research by Begbies Traynor, quoted in the first Daily Telegraph article, suggests that many businesses have been lulled into a false sense of security by the fact that heavy debt burdens could be serviced at the historic low rates enjoyed since 2007.  Begbies Traynor point to a rise in “zombie businesses” defined as those remaining afloat thanks to these low interest rates and a flexible labour market.  However, these firms generally operate with negative net worth and so have little capital to invest in their short term growth or long term survival and could quickly find themselves tipping into insolvency should they become unable to pay their debts as they fall due, if cash flow issues arise following the interest rate rise.

However, in separate research conducted by the Institute of Chartered Accountants in England and Wales (ICAEW) and also reported in the Daily Telegraph a few days later, the conclusion reached is markedly different.  The ICAEW research shows that UK businesses’ profits are rising and many are looking to grow and invest in development.  Exports are growing at their fastest rate since 2015 and businesses are now much more cost conscious, which in turn increases their profit margins. EY have also conducted research which suggests that 60% of UK companies are looking to acquire another business in the year ahead, which is an 8 year high percentage. Steve Ivernee, managing partner at EY is quoted as saying that, despite Brexit uncertainty, “the confidence [shown] by UK companies implies a strong belief in their ability to respond.”

This bullishness is reflected in the Insolvency Service’s official figures for Q2 of 2017.  Overall, company insolvencies fell to their lowest quarterly level since records began in 2000 (although the figures themselves are slightly skewed given the insolvency of 1131 connected personal service companies which went into liquidation on the same day). Personal insolvency also fell by nearly 10% on Q1 2017 figures.

As with all economic and political analysis given at the moment, any predictions come with the rider we’ve become wearyingly familiar with “the future remains uncertain”. It remains to be seen whether the recent interest rate rise will tip these “zombie businesses” over the edge into insolvency and then the official insolvency figures for Q4 of 2017 could begin to paint a very different picture.  Exports may grind to a halt should crippling trade tariffs be imposed due to Brexit. Indeed, Mark Carney, governor of the Bank of England, said on Peston on Sunday on 5 November that Britain would be “booming” if it weren’t for Brexit.  He claims that businesses are waiting to see what would happen with the exit negotiations before making investment decisions.  If he is right, this could see EY’s forecast of 60% of companies looking to make an acquisition slashed to nearer zero.

Carney did acknowledge that for now the economy is strong, with jobs and exports on the rise, however he is of the view that it is just growing, not booming. The interest rate rise was agreed in an effort to stave off rising inflation affecting already squeezed UK households, which in turn slows spending in the economy.

So in conclusion, is it boom or bust? The answer is perhaps like some of the fireworks displays we may have seen at Bonfire Night parties recently – there is a lot of excitement, potential and a lot of noise, but a number of fragile and vulnerable businesses may finally fizzle out. And yet the economy could take off like a rocket and ignite a boom economy, in which UK businesses flourish.  As ever, in our current climate, only time will tell.