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Profitability Squeeze Looms as Global Business Insolvencies Eclipse Pre-Pandemic Highs

Last Updated February 28, 2024 5:36 PM
Shraddha Sharma
Last Updated February 28, 2024 5:36 PM

Key Takeaways

  • Business insolvencies have escalated globally, with a rise predicted for 2024.
  • Advanced economies are experiencing insolvencies well above pre-pandemic levels, Alliance Trade noted.
  • The profitability of businesses could come under severe pressure.

Allianz Trade released a troubling forecast, highlighting a global uptick in business insolvencies that has surpassed pre-pandemic figures. The report  raises alarms for the global economy’s future stability.

With insolvencies on the rise, an emerging trend in AI is pumping the stock markets. What should we expect in the next couple of years?

Rising Tide of Global Insolvencies

 The report reveals a concerning trend: three-quarters of countries experienced a rebound in business insolvencies in 2023, leading to a 7% increase globally. The following year is expected to see an even steeper rise of 9%, pushing two-thirds of countries above their pre-pandemic insolvency levels. it’s expected that this increase will level off in 2025, but it will still be at an unusually high level.

Global insolvencies | Source: Alliance Trade
Global insolvencies | Image Reprinted from Alliance Trade Report 2024

Profitability Pressures in Focus

Businesses worldwide are grappling with a squeeze on profitability, driven by a combination of declining global demand, heightened competition, and stubbornly high operating costs. Allianz Trade warns that the economic activity in several countries, including the US and the Eurozone, is unlikely to stabilize the rising number of insolvencies without a significant boost in GDP growth.

This challenging environment is further exacerbated by uncertainties stemming from geopolitics, regulatory changes, and non-payment risks. 

 Firms are also reportedly facing tough financing and liquidity conditions. High borrowing costs and limited financing availability pose risks to sectors and businesses already vulnerable. The report highlights that a notable percentage of firms in countries like the UK, France, Italy, and Germany are particularly fragile.

Sector-Specific Risks and Areas of Growth

The post-pandemic surge in business creation faces its first major test of resilience in 2024, with insolvency rates expected to rise naturally. Certain sectors, particularly those dependent on discretionary spending and labor-intensive industries, are at a higher risk of business failures, affecting jobs and the wider economy.

 In a separate report  by UBS’ equity strategy team, led by Andrew Garthwaite, a potential stock surge fueled by advancements in artificial intelligence (AI) is on the cards. The concerns are somewhat leveled by the optimistic scenario. Analysts have been comparing AI’s productivity growth to the tech revolution of the late 1990s.

Leveraging into 2024

The Allianz Trade Insolvency Report and UBS’s predictions provide a financial picture of 2024. On one hand, the increase in business insolvencies marks the pressing challenges of profitability, financing, and sector-specific risks.

On the other, the potential for AI to drive a stock market rally offers a glimmer of hope. However, over the longer term, major challenges subside and the short term has to be navigated with caution.

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