Many economies are returning to normal in 2022. However, a new analysis predicts that insolvencies will increase in the following periods.
According to Atradius’s most recent Insolvency Forecast report, the world economy will gradually recover from the Covid pandemic in 2022. As governments have lifted most restrictions, this will surely help businesses emerge.
Even now we can see that many people have resumed their usual lives. However, Atradius claims that we have already exploited the majority of the benefits of reopening these economies. Additionally, with the relaxation of restrictions, government support also ends. As a result, it can result in a rise in worldwide insolvencies.
Factors that can affect the increase in insolvencies
The report also anticipates a slower GDP growth rate for 2022. Meanwhile, price pressures will rise. Congested supply chains, rising consumer demand, and the impact of the crisis in Ukraine will each play a role in the hike of it. Apart from these obstacles, Atradius predicts that there won’t be a recession in 2022. rather, the major effect of Russia’s invasion of Ukraine is likely to be higher commodity prices. The analysis projects that worldwide inflation will reach 6.1% in 2022. This will have a detrimental effect on consumer purchasing power and global GDP growth. So, the GDP growth rate for 2022 will be moderate to 3.4% while it was 5.9% in 2021.
How did government support affect economies during the pandemic?
Atradius Senior Underwriter Nicola Harris stated: “The past two years were undoubtedly exceptional. We will enter a time of adjustment as we come out of the pandemic and as economies begin to recover. That’s what we are now beginning to notice. He further adds that the level of government help provided to businesses during Covid was beyond anything we had ever seen. And this is not the case for just the Uk but the whole world. One outcome of this help was a significant drop in insolvencies. It plummeted by a total of 29% globally in 2020–21.
Besides safeguarding healthy enterprises, these government efforts also aided in the emergence of “zombie companies”. These are companies that would have failed in the pre-pandemic time but have persevered longer with the support they received. So, in many ways, the expected increase in insolvencies this year is a sign of things getting back to normal.
The picture of rising insolvencies around the world
Atradius’ report lists the nations where insolvencies can increase. Moreover, it also predicts where numbers will stay stable or decline during the upcoming year. A partial return to normalcy in 2021 caused an early spike in insolvency in some countries. This includes Spain, Italy, and the Czech Republic. Nonetheless, we can expect insolvencies to stay steady in these markets in 2022. However, Atradius anticipates that the changes will occur for the bulk of markets in 2022 and 2023. Moreover, it’ll see an increase in defaults in line with the gradual withdrawal of government support.
On the other hand, New Zealand and Hong Kong are two exceptions, where the prediction shows that insolvencies would decline in 2022. According to Atradius, this is because of ongoing financial support. This is expected to last through the end of 2022. Thus, this is probably going to lead to an inflated growth rate in 2023 that will be the highest in all markets.
There are, of course, certain other things at play in this situation. The most important of these things is the Russian invasion of Ukraine, Nicola said. We expect a sharp rise in insolvencies in Russia in 2022. This is in part because of the country’s economic downturn brought on by the sanctions imposed in reaction to the conflict in Ukraine. Moreover, many European nations rely on Russia as a source of energy. Thus, these nations are likely to be among those affected by the conflict and subsequent rise in energy prices the most severely.
What does the report predict for the future?
The report says that insolvency levels will have substantially stabilized by 2023. As a result, they will either start to decline or stay the same. However, businesses will need to adapt to a situation without major government backing in the upcoming years. This can be difficult for some people because they racked up a lot of debt during the pandemic. So, risk management is more crucial than ever in an uncertain world. Making sure your company is secure and ready for the unexpected is the most important lesson we’ve learned over the past few years. Moreover, one important strategy for preventing non-payment is trade credit insurance we have learned so far. This also gives you access to expert knowledge and guidance for better trading decisions.