Business failures are flirting with all-time highs

A persistently difficult economic environment for businesses

The economic environment for companies stabilized in early 2024 and, in certain respects, even showed improvement with another substantial rise in salaried employment (185,00 year-on-year in Q1 2024) and a recovery, since Q4 2023, in household purchasing power. This rebound can be attributed to an easing of inflation, with prices up +2.1% year-on-year in June 2024 compared with +4.5% in June 2023. Average corporate profit margins have also enjoyed a significant improvement even if, in early 2024, this metric lost some of the ground it had previously gained in 2023.

Despite this, the pace of economic activity, while not accelerating, seems to be stabilizing at around 1.2% GDP growth while inflation in services – which is essentially driven by higher wages – is depressing profit margins and limiting the prospects of a Eurozone-wide cut in key interest rates. Political uncertainty and the state of public finances are also weighing down on long rates, limiting the scope and speed of the reduction in financing costs. What is more, SMEs have to contend with margin rates well below the French corporate average, notably in the construction sector and household services. These smaller businesses continue to prioritize a strategy of financial consolidation with a further decline in their debt/equity ratios and the repayment of more than 55% of their state-guaranteed loans at a time when the outlook for their business activities and cash flow are deemed mediocre, limiting their investment and their recourse to credit. While only 2.4% of SMEs and 4.3% of micro-businesses fear they will be unable to repay their state-guaranteed loans, the difficulties confronting certain sectors may leave the more vulnerable companies further exposed, especially as the Urssaf social security collection agencies have returned to their more traditional recovery practices after putting them on pause during the COVID health crisis.

The disconcerting trend in SME/ISE insolvencies is a cause for alarm

In this rather lackluster economic environment, business failures have continued to rise since the beginning of 2024. BPCE L’Observatoire counted 16,405 insolvencies in Q2 2024 (+28% vs. Q2 2019), taking the total number of business failures¹ in France over the past 12 months to 62,844 (+21% vs. 2019).

According to Alain Tourdjman, Director of BPCE Economic Research, and the BPCE economist Julien Laugier this trend is the expression of a kind of ‘catch-up’ effect triggered by insolvencies that should have happened between 2020 and 2022, and confirms a number of red flags already visible at an earlier date:

Overall, insolvencies are approaching ‘all-high’ levels for the past 15 years with the 2^nd  quarter of 2024 proving to be the worst since 2009. Since Q4 2023, the rate of defaults has exceeded the 2010-2015 period, which was historically the worst since we began tracking insolvencies in 2009.

Admittedly, this high point can be explained in part by a ‘catch-up’ effect with business failures occurring now after they were postponed artificially between 2020 and 2022, a phenomenon that cannot be extrapolated into the future but which currently only concerns 22% of the potential insolvencies for this period. Substantial differences exist, however, between the very large number of small entities employing fewer than 3 people (whose ‘catch-up’ rate is only 13%) and SMEs where, statistically, almost all (93%) of the insolvencies avoided thanks to the “whatever it takes” scheme have occurred since 2023.

While SME/ISE insolvencies remain at a high level (56% higher than in 2019), they appear to be levelling off. Generally speaking, three different situations can be identified depending on the company’s size in terms of number of employees:

• Over a sliding 1-month period from Q3 2023 to Q2 2024, almost 5,300 SME/ISEs (employing 10 people or more) went bankrupt vs. 3,400 in 2019. With the exception of entities employing between 50 and 99 people – for which the ‘catch-up’ process is not yet over – we estimate that almost all the SME/ISE insolvencies avoided during the Covid crisis were simply postponed,
• Very small enterprises (VSEs) employing between 3 and 9 people, which have seen a 30% increase in the number of insolvencies vs. 2019, are only experiencing a limited catch-up of business failures avoided between 2020 and 2022,
• Microenterprises and the smallest VSEs (with no employees or employing just 1 or 2 people) are experiencing a sharp increase in the number of insolvencies (+16% over the last 12 months vs. 2019), whereas they were less affected by the overall rise in business failures previously.

The impact in terms of jobs – a metric that makes it possible to assess the economic impact of the insolvencies – has also stabilized at a very high level owing to the average size of the entities concerned, with a total of 264,000 jobs at risk. This is a very high level, 40% above 2019, including more than 62,000 lost jobs in Q2 2024 alone. The economic impact of business failures in terms of jobs at risk is showing no signs of softening, and the same is probably also true if the impact were measured in terms of value, receivables, capital, business-to-business interactions, etc., according to Alain Tourdjman and Julien Laugier.

An analysis by company size suggests that the high level of insolvencies cannot be explained by the recent increase in the number of new business creations (chiefly businesses with no employees). Measuring business failures according to the age of the company confirms this hypothesis: businesses created more than 3 years old, and even more than 5 years ago, are much more concerned by insolvency whereas more recently created companies are less affected by bankruptcy than in 2015 and 2019.

By region: it emerges that some parts of the country are highly vulnerable while others are less affected. The south-western quarter of France (Midi-Pyrénées, Aquitaine, Poitou-Charentes) along with the Rhône-Alpes and Martinique are highly exposed, including in the SME/ISE segment. Conversely, the regions affected the least seem to be less economically dynamic parts of France (Lorraine, Limousin, Réunion Island, etc.). These regional differences may be explained by other factors, however, such as the extent to which Urssaf collection practices have returned to normal after their suspension during the Covid crisis, and the degree of industrial specialization.

By business sector: the effects of inflation, rising interest rates, and changes in household consumption patterns can be observed to varying degrees in different business sectors. Over the past six months, certain sectors have suffered from the simultaneous impact of a high level of insolvencies along with a marked deterioration in their business environment: financial and insurance activities, notably brokerage and consultancy services; road haulage; real estate (private property development and real estate agencies); certain scientific and technical activities (such as head office activities, public relations, design and consultancy firms, engineering and technical studies, construction cost analysts). Conversely, the most resilient sectors are: health, education, recreational activities (sports, arts, culture), manufacturing industry (excluding agri-food), drinks outlets, transport (non-road), agricultural livestock farming.

No tsunami of business failures in 2024, but probably the highest level in the past 15 years

For Alain Tourdjman, the latest figures mean that we should revise our forecast for 2024 slightly upwards (from 62,000 business failures to around 65,000). Beyond these aggregate figures, the typology of insolvencies in 2024 is also likely to change, under the impact of the following factors:

• A probable rise in the number of insolvencies among smaller entities, companies that have hitherto been less exposed with, however, a slight improvement in sectors that have been hard hit in recent quarters by changes in household consumption, notably food retailing and personal services.
• With the insolvency ‘catch-up’ effect already well advanced among SMEs, the number of business failures among SMEs and ISEs is expected to stabilize with, however, the number of jobs at risk remaining at a high level, in the region of 250,000 to 265,000.

1 Using data extracted and processed by our economists, BPCE L’Observatoire is now able to provide a highly detailed statistical and economic analysis of business failures.