The disturbing trend in insolvencies among businesses should set the alarm bells ringing!

Over the past 12 months, more than 59,000 businesses have failed to meet their financial obligations (vs. 51,800 in 2019). Although this overall trend masks a great many disparities, it nevertheless – and above all – raises a number of red flags.

A tense economic environment for companies for more than a year

2023 was a major economic turning point for business organizations with inflation, higher interest rates, an economic slowdown, and the repayment of Covid debt (State-guaranteed loans, social and fiscal debt) being some of the factors putting stress on corporate operating conditions for more than a year:

• Although economic growth was undeniably limited in 2023 (around +0.9% after +2.5% in 2022), the French economy avoided falling into recession and new job creation remained buoyant,
• Inflation, which first began with energy prices, spread to the rest of the economy through so-called ‘second-round effects,’ triggering negative outcomes for the majority of companies (squeezed margins, notably in the service sector) and leading to reduced household consumption, especially in the food sector,
• In response to this inflationary shock, interest rates experienced a very rapid, and extremely brutal, rise leading to higher financing costs not only for business organizations but also for households, depressing in particular their investment in housing and durable goods,
• Lastly, the repayment of State-guaranteed loans continued in 2023, and the Urssaf social protection collection body increased its campaign of sending formal requests for outstanding debt payments in certain regions of France, especially since September 2023.
• la croissance économique en 2023 était certes limitée (+0,9 % après +2,5 % en 2022), mais une récession a été évitée et les créations d’emplois sont restées dynamiques.

In 2024, the economic growth rate is expected to slow slightly once again (forecast at +0.7%) but, thanks to a decrease in inflationary pressure, consumption is expected to revive. In addition, the impact of the ECB rate cut on financing costs should be partly offset by the inertia of long-term rates. At the same time, the repayment of Covid-related debt will continue, along with the return to normal of Urssaf’s behavior regarding the collection of outstanding debts. 2024 should therefore be a year when things go back to normal for the French economy.

This lackluster economic environment is, however, subject to a number of uncertainties (2 of which are negative and 1 is positive):

• The extent and specific details of the tightening of French fiscal policy in 2024 and 2025 remain uncertain following the recent announcement that the public deficit will grow in 2023 (to -5.5% after -4.8% in 2022). While tax hikes have been ruled out for the time being, spending and investment cuts could hamper business opportunities in certain sectors,
• Increased geopolitical tensions in recent weeks could disrupt supply chains and have an impact on energy prices,
• The Olympic & Paralympic Games Paris 2024 should generate opportunities precisely in those sectors most burdened by debt in the wake of the Covid crisis (tourism, hotels & catering, household services).

The disturbing trend in insolvencies among SMEs and intermediate-sized companies is a cause for alarm

In the context of these operating conditions, it came as no surprise that business failures rose sharply in 2023 after what was an extremely atypical period. BPCE L’Observatoire counted 16,801 insolvencies in Q1-2024 (+15% greater than in Q1-2019), taking the number of insolvencies in France over the past 12 months to a total of 59,000 (+12% vs. 2019).

This trend therefore resembles a ‘back to normal’ scenario (without a ‘backlog resolution’ effect on insolvencies avoided between 2020 and 2022), which may appear reassuring at first glance but nevertheless raises a number of red flags according to Alain Tourdjman, BPCE’s Director of Economic Research, and Julien Laugier, a Groupe BPCE economist.

Overall, the situation continued to deteriorate at the start of 2024. With a recorded total of approximately 17,000 insolvencies, Q1-2024 was the worst quarter since 2015. This follows a record established in Q4-2023, which was the highest point since at least 2009 (when our tracking of business failures first began). It is clear, therefore, that the trend is definitely worsening, and not easing.

Insolvencies among SMEs and intermediate-sized companies are reaching a disturbing level. Generally speaking, we can identify three different situations, depending on the number of the people employed by the company:

• More than 1,400 SMEs and intermediate-sized companies (employing 10 people or more) filed for insolvency in Q1-2024 (vs. 925 in Q1-2019). Over the past twelve months, more than 5,000 SMEs and intermediate-sized companies have gone bankrupt, creating a significant economic impact in terms of jobs at risk, loan outstandings, added value, etc. We estimate that around 70% of the failures of SMEs/intermediate-sized companies avoided during the Covid period have now occurred. For SMEs/intermediate-sized companies therefore, the phenomenon resembles a major absorption of a backlog of postponed insolvencies rather than a simple return to normal.
• VSEs employing between 3 and 9 people – a category experiencing a 26% higher rate of insolvencies than in 2019 – are seeing early signs of the resolution of the backlog of insolvencies avoided between 2020 and 2022.
• Micro-businesses and the smallest VSEs (with no employees, or employing 1 or 2 people) are seeing their insolvency rate return to normal (+7% over the past 12 months vs. 2019).

Impact in terms of jobs. The rate of business failures among the largest entities (large VSEs and SMEs/intermediate-sized companies) has increased. The economic impact of insolvencies is consequently greater than in 2019, notably in terms of jobs, with 240,000 positions becoming at risk over the past 12 months (+25% vs. 2019), including 62,000 in Q1-2024 alone. No reduction in the economic impact of business failures is observed in terms of the number of jobs at risk, and the same is also probably true if this impact were measured using different criteria such as value, receivables, capital, and B2B interactions.

By region, some geographical areas are proving to be extremely vulnerable whereas others remain unaffected. The Midi-Pyrénées region in southwest France noted a significant increase (+34% insolvencies vs. 2019). In the SME/intermediate-sized company segment alone, insolvencies in Poitou-Charentes, Aquitaine, Martinique and Rhône-Alpes reached record levels in 2023 (between +59% and +99% vs. 2019). Conversely, the least affected territories appear to be those that are less economically dynamic (Lorraine, Limousin, Réunion Island, Corsica). Other factors may also explain these differences between geographical regions, such as the degree to which Urssaf debt collections have returned to more typical levels, as well as sector-specific specializations.

On a sector basis, with a few rare exceptions, the sectors affected have been exposed to changes in the business environment over the past year and a half (inflation, higher interest rates, changes in household consumption patterns). In particular, changes in household consumption have weakened the food retailing and personal services sectors directly (beauty and body care, hairdressing, etc.) and, indirectly, road haulage activities. In addition, higher interest rates have weakened the real estate sector (estate agencies and property developers in particular) and the construction industry (especially installation work related to electricity, plumbing, and insulation), along with certain financial and insurance activities (fund managers, financial advisory, management, and brokerage services). Q1-2024, in particular, saw a sharp increase in insolvencies in the hotel/hospitality sector, the wholesale trade, business services and technical activities (notably building maintenance, landscaping, consultancy services, and technical studies, etc.). Conversely, the most resilient sectors are healthcare, recreation (sports, arts, culture), the manufacturing industry (excluding agri-food) and establishments selling beverages.

Not a tsunami but a ‘high tide’: insolvencies rise by 10% in 2024, and should remain at a high level in 2025

According to Alain Tourdjman, the latest figures confirm our earlier forecast of a rise in insolvencies in 2024 of around 10% (to about 62,000 cases), a far cry from a ‘tsunami’ scenario that, in our view, was never credible. On the other hand, it is increasingly likely that there will be a ‘high tide’ in insolvencies with a large number of business insolvencies over the next few quarters and even continuing until mid-2025 (at least 60,000 bankruptcies). Looking beyond the overall figures, the typology of business failures in 2024 is likely to change under the impact of the following:

• changes in the forces driving business activities, notably the rebound in consumer spending. It is expected that the situation in the retail, agri-food and personal services sectors will improve while company failures in construction, catering and business services are likely to increase in 2024. There is greater uncertainty about the outlook for the manufacturing sector (excluding agri-food) in 2024,
• The extent of backlog resolution already started among SMEs. Indeed, insolvencies are likely to increase among the smallest entities – where the absorption of delayed insolvencies is only expected to begin in 2024 – while the number of company failures should stabilize among SMEs and intermediate-sized companies this year. As a result, the number of jobs threatened by the 62,000 insolvencies anticipated in 2024 is unlikely to rise much above the current very high level (approximately 250,000 jobs threatened in full-year 2024).