The failures of SMEs and ISEs in 2023-2024 cancel out the effects of the ‘Whatever It Takes’ policy

An economic environment that remains difficult for the business community

The economic environment for the business community is stabilizing and, in certain respects, even showing improvements with new growth in private sector employment (61,000 year-on-year in Q2 2024) and a rebound in household purchasing power since Q4 2023 thanks to lower inflation, with prices at +1.2% year-on-year in September 2024 compared to +4.9% in September 2023. Furthermore, obstacles to securing financing remain contained according to the latest BPI-Le Lab barometer survey and, while the average corporate profit margin has decreased compared to last year, this margin remains at a satisfactory level for France (around 31%).

However, the pace of economic activity seems to be settling at GDP growth of around 1% rather than gathering speed, and inflation in services, primarily driven by higher wages, is weighing down on margins and hindering the reduction of key interest rates across the Eurozone. The decline in financing costs for businesses is also being held up by the state of public finances and the resulting pressures on long-term rates in France, limiting the potential and speed of reductions in financing costs and exerting a more specific impact on demand in certain industrial sectors (real estate and construction).

What is more, SMEs must contend with structurally lower profit margins compared to the average for French companies, particularly in construction and household services. These smaller businesses frequently continue to prioritize financial consolidation by reducing their debt-to-equity ratio and repaying over 55% of the State-guaranteed loans granted during the COVID epidemic at a time when their activity and cash flow prospects are both deemed to be poor and limit their investment capacity and use of credit. Only 2.4% of SMEs and 4.3% of microenterprises fear they will not be able to repay their State-guaranteed loans but difficulties in certain sectors could weaken the more vulnerable, especially as the Urssaf social security collection agency has returned to more traditional practices after pausing its activities during the health crisis.

SMEs and intermediate-sized enterprises are particularly affected!

Business failures have continued to rise since the end of 2023 in this unfavorable economic environment. BPCE L’Observatoire counts 13,035 bankruptcies in Q3 2024 (+20% compared to Q3 2019), bringing the total number of corporate insolvencies in France over the past 12 months to 64,427 (+24% compared to 2019).

This trend highlights a form of ’catch-up‘ for bankruptcies avoided between 2020 and 2022 and confirms certain warning signs already perceptible earlier, according to Alain Tourdjman, Director of Economic Studies at BPCE, and Julien Laugier, Economist at BPCE:

Overall, failures have exceeded the ’record‘ levels of the past 15 years. Over the past 12 months, the rate of defaults is higher than during the 2010-2015 period, which was the last period of particular difficulty for French companies. However, based on what is still provisional data, business failures from July to September 2024 are certainly very high but they are no higher than the high points reached in 2013-2014.

This high level is partly explained by a catch-up of bankruptcies avoided between 2020 and 2022, a phenomenon that cannot be extrapolated and currently only concerns 28% of the potential from that period. In fact, there exists significant heterogeneity related to size. For entities with fewer than 3 employees, the ’catch-up‘ of failures avoided by the ’whatever it takes‘ policy only reaches 17%, while it now exceeds 100% for SMEs and intermediate-sized enterprises. In other words and from a statistical standpoint, all the SME bankruptcies avoided from 2020 to 2022 thanks to the various support measures have ultimately occurred since 2023.

The number of failures among SMEs and intermediate-sized enterprises consequently remains at a high level, 57% above that of 2019, but this number seems to be stabilizing. Generally, three different situations can be observed based on company size:

• From on a rolling 12-month basis from Q4 2023 to Q3 2024, 5,349 SMEs and intermediate-sized enterprises (10 employees and more) went bankrupt, compared to 3,400 in 2019, representing an increase of 57%. If we exclude entities with 50 to 99 employees, which have not yet fully returned to their expected bankruptcy levels in the absence of the COVID support measures, the failures of SMEs and intermediate-sized enterprises avoided from 2020 to 2022 were only postponed to 2023-2024.
• Very small enterprises employing 3 to 9 employees show a 32% increase in failures compared to 2019 and experience only a partial catch-up of failures avoided between 2020 and 2022.
• Microenterprises and the smallest very small enterprises (without employees or employing 1 or 2 employees) are lagging behind with a 19% increase in failures over the past 12 months compared to 2019 but are currently experiencing a significant acceleration in their bankruptcy rate, whereas they were previously less affected by the overall increase in insolvencies.

The impact on jobs, which makes it possible to assess the economic impact of these business failures, is also stabilizing at a very high level owing to the average size of the entities concerned, with over 250,000 jobs at risk. This is a very high level, 43% above 2019, with more than 44,000 jobs lost in Q3 2024 alone. The economic impact of defaults thus remains strong in terms of the risk of job losses, and probably also in terms of value, receivables, capital, inter-company interactions, etc., according to Alain Tourdjman and Julien Laugier.

Analysis by size suggests that the high level of failures cannot be explained by the recent surge in new business creations (companies chiefly without employees). The measurement of defaults by company age confirms this hypothesis: the increase in bankruptcies has predominantly affected companies older than 3 years, and even those older than 5 years. Thus, over the past 12 months, recent creations contribute less than in 2015 or 2019 to the number of insolvencies recorded.

In terms of region, certain areas are particularly vulnerable while others remain unscathed. The southwestern quarter of France (Midi-Pyrénées, Aquitaine, Poitou-Charentes) as well as the Rhône-Alpes and Île-de-France regions are highly exposed, including in the SME and intermediate-sized enterprise segment. In contrast, the most sheltered territories seem to be less economically dynamic (Lorraine, Limousin, Réunion, etc.). Other factors may also explain regional disparities, such as the degree of normalization in the Urssaf’s collection of social security contributions and specializations in terms of industrial sectors.

On the basis of different industrial sectors, we observe varying degrees of impact from inflation, rising interest rates, and changing household consumption patterns. In particular, certain sectors experienced record levels of bankruptcies during our analysis period (up to 2009): financial and insurance activities, particularly brokerage and consulting; road freight transport; real estate (private development and real estate agencies); certain scientific and technical activities (such as corporate headquarters activities, public relations, consulting firms, engineering, and technical studies, economists specializing in the construction industry); and vehicle trade and repair. In contrast, the most resilient sectors include recreational activities (sports, arts, culture), beverage establishments, non-road transport, agricultural livestock activities, and accommodation (hotels, camping, etc.).

Approximately 65,000 business failures forecast for 2024: not a tsunami, but the highest level in the past 15 years

The latest figures lead us to maintain our forecast for 2024 at around 65,000 corporate bankruptcies, according to Alain Tourdjman. This would represent the highest level in at least 15 years. Beyond the overall figures, the change in the typology of failing companies is expected to continue owing to…

• … the acceleration of defaults among small entities, which have hitherto been less exposed with, however, a slight improvement in sectors that have been severely affected in recent quarters by changes in household consumption, particularly in the food and even personal services sectors.
• … the already advanced catch-up for SMEs, with bankruptcies expected to stabilize among SMEs and intermediate-sized enterprises, while the number of jobs at risk should remain high, at close to 250,000 jobs.

* Using data obtained and analyzed by our economists, BPCE L’Observatoire is now able to provide a very detailed statistical and economic analysis of business failures