Insolvencies Are on the Rise

Insurers must prepare for disruptions in the availability of cash, the functionality of global supply chains, global GDP growth and various other factors.

Low angle shot of a tall office building

The number of companies that are at risk of insolvency globally is on the rise. reversing a trend seen earlier in the year that briefly indicated insolvencies were actually going down.

The systematic increase of insolvencies will have a widespread impact on the global economy. When firms of all kinds are unable to pay off their debts, the general distribution of cash and cash equivalents will always be at risk. Furthermore, while this current rise is expected to be temporary—and in many cases, simply represents an adjustment to the “post” pandemic economy—insurers and other major financial players must account for the likelihood that increased levels of insolvency will directly affect the general availability of cash, the functionality of global supply chains, global GDP growth and various other factors.

The Irreversible Link Between Insolvencies and Inflation

As one might expect, the recent rise in inflation—which has occurred in nearly every country around the world—is inextricably linked with many companies’ risks of insolvency. This risk has been especially prevalent among companies that are heavily reliant on international shipping and also among those that are notably energy dependent. In the U.S., inflation figures have hovered near 9% year over year, and similar (if not higher) figures have been produced throughout Europe and other nations.

There is a strong correlation between the recent rise in insolvencies and the recent rise in inflation. When the costs associated with performing certain functions increase—including the acquisition of raw materials, manufacturing of these materials, shipping of finished products, labor and many others—and the revenues yielded in producing these goods are not proportionately compensated, insolvency issues are likely to emerge.

This problem is particularly exacerbated by the simple fact that many firms that have large amounts of debt to service are locked into inflexible contracts. As inflation rises and the costs associated with performing any sort of institutional function directly increase, firms around the world are finding it harder to maintain their economic status quo.

The Proliferation of Global and US-Centric Economic Issues

Recent economic reports indicate that the rise in insolvencies will directly affect the economic well-being of the U.S., the U.K. and most other countries around the world.

Perhaps one of the most startling figures is the projection that the U.S. economy (as measured by GDP) is expected to retract by 1.4% compared with where it was a year ago—a figure that is especially startling considering that the population has increased by nearly 1% over the past year. This means that, necessarily, American GDP per capita is on the decline.

But the rise in insolvencies, along with highly correlated issues such as inflation, is not limited to the U.S. In fact, in response to these and other economic challenges, Atradius recently adjusted its future global GDP growth forecast from 3.2% to 2.4%. While a portion of this adjustment can be attributed to increased global development (making it more difficult for many countries, particularly China, to keep growing at their previous rates), the very existence of an adjustment is still problematic.

See also: Choose Your Companies Carefully

The Good News—There Is Still Hope for Avoiding an International Recession

The most recent batch of economic data might, on the surface, make it difficult to be optimistic about the world’s economic future. After all, the sudden and widespread increase in insolvencies indicates that the simple practice of servicing debts will be much harder to accomplish.

But, even in light of this recent information, there still is some good news: The probability of a near-term global recession is somewhat low. The global economy will continue to grow—especially in the developing parts of the world—and, as the world is able to recover from the COVID-19 pandemic, this growth will accelerate. The odds of a recession in the U.S. in the next six to 12 months are moderate and rising, while, in Europe, a recession is almost a given. 

Of course, there are still quite a few trends and variables that economists will need to account for. The general lubrication of global supply chains, the existence of international conflicts (including the Russian-Ukrainian war) and the general cost of energy will all, to some extent, affect the near future of the global economy. Nevertheless, there are at least a few reasons to remain optimistic and forecast a better tomorrow.

Eric Morgan

Profile picture for user EricMorgan

Eric Morgan

Eric S. Morgan is a senior manager of risk services at Atradius Trade Credit Insurance.

He is responsible for managing the portfolio management tools and ensuring efficient portfolio management. Morgan and his team also help guide customers' trading activities and protect their balance sheets with prudent risk management. He provides customers with global expertise, effective risk management strategies and market information.

Prior to joining Atradius, Morgan worked in credit and collection roles for one of the world’s largest staffing firms.

Morgan holds a B.S. from Salisbury University.

Read More