Insolvencies Grow as UK's Debt Obsession Heads for a Reckoning

- Both corporate and individual insolvencies on the increase
- "Sooner or later the music has to stop"
- Bank of England's low-rate policy could be fuelling the next crisis

New data from the UK's Insolvency Service show insolvencies are rising at a concerning rate, with one accountancy professional warning the human cost of the economic slowdown "is getting more acute by the day."

The Insolvency Service report total individual insolvencies increased in Q1 2018, reaching the highest quarterly level since Q3 2012.

This was driven primarily by an increase in individual voluntary arrangements, which reached a record high, while the number of bankruptcies and debt relief orders also increased.

On the corporate front, the underlying number of insolvencies (excluding bulk insolvencies) increased in Q1 2018, to the highest quarterly level since Q1 2014.

This was driven by a rise in underlying creditors’ voluntary liquidations, and compulsory liquidations.

Insolvencies are where a company is no longer able to pay debts and enters liquidation,  administration or other company rescue process. An individual insolvency involves someone who is no longer able to pay debts and enters formal procedures.

“Britain’s economy is far from a recession but the human cost of its slowdown is getting more acute by the day," says Brian Johnson, insolvency partner at the chartered accountants HW Fisher & Company. “Such a big jump in the number of individual insolvencies is a grim reminder of just how tight many people’s finances are."

HW Fisher & Company believe years of weak wage growth and cheap credit have led millions of Britons to become dangerously leveraged all over again, funding comfortable lifestyles with high levels of debt.

“This approach is fine as long as the economy keeps growing. But sooner or later the music has to stop – and the sharp slowdown in economic growth seen in the first quarter suggests that day of reckoning is getting closer," says Johnson.

The insolvency data come on the same day that it is revealed the UK economy grew a paltry 0.1% in the first three months of 2018, confirming the steady trend of slowing economic growth remains in control.

Johnson says if there is one crumb of comfort in the deteriorating insolvency picture, it is that the Bank of England will be very unlikely to raise interest rates any time soon.

“So the fool’s paradise of low interest rates will continue, for now. But with the economy losing momentum and a worrying number of people falling off the cliff into insolvency, today’s data is an abrupt wake up call,” says Johnson.

Recent data from the ONS shows the UK's households’ saving ratio fell to an annual record low of 4.9% in 2017 (since comparable records began in 1963) as growth in households’ spending exceeded the growth of households’ income.

Latest estimates suggest households were net borrowers in 2017 for the first time since records began in 1987; this reflects five consecutive quarters of net borrowing by households.

The prolonged era of record-low interest rates being overseen by the Bank of England is certainly having an effect, and it is not hard to see how these record-low rates might just have been the source of the next debt-fuelled implosion.

That interest rates are at record lows in the midst of an historically prolonged economic expansion flies in the face of typical economic assumptions on monetary policy that warns of the dangers posed when the supply of money is too generous. 

For now though the Bank of England is not too concerned by UK debt dynamics, noting that the country's financial institutions are in good health with measures taken since the 2008 financial crisis ensuring their capital buffers can withstand a significant rise in debt defaults.

That does not however suggest a significant debt-fuelled hangover will not impact the economy at somepoint, even if it is not of the scale and severity of the 2008 crisis.

The calls by a number of economists for the Bank to raise interest rates will therefore continue to be made.