By Daniel Hunter

Ahead of the release of the latest GDP figures this week, the most recent Begbies Traynor Red Flag Alert research for Q1 2013, which monitors the financial health of corporate UK, shows that the recovery of UK plc continues, with a 34% decline in critical financial distress among UK businesses compared to Q1 2012.

Across all sectors, UK businesses experiencing critical financial problems reduced from 5000 in Q1 2012 to 3283 in Q1 2013, indicating that the UK economy has turned a corner.

However this positive picture, led predominantly by improvements in the UK’s vital business services sector, masks a patchy recovery with sectors reliant on the consumer economy (general retail, leisure and media) as well as real estate, witnessing an increase in financial distress for the period.

“The year on year improvement reflects the continued forbearance and benign monetary conditions facing UK businesses today, combined with an improving credit environment, albeit primarily for larger corporates. Business confidence is slowly returning in the form of greater business spending on both services and investment," Julie Palmer, Partner at Begbies Traynor, commented.

When comparing the data on a quarterly basis, it reveals an 8% increase in critical financial distress from 3,044 in Q4 2012. This increase could largely be attributable to seasonal factors such as the propensity for creditors and directors to take action ahead of having to file accounts for the new tax year.

However certain consumer-facing sectors, including leisure (up 81%), hotels (up 63%) and general retail (up 27%) have been impacted by the unseasonably cold weather experienced throughout the first quarter of 2013.

Meanwhile the ongoing lack of funding to support the important small to medium-sized enterprise (SME) sector is a growing concern. Begbies Traynor’s analysis of new lending to business across its Red Flag database, which is predominantly SMEs, found that the number of companies that secured new funding, at 15,804 in Q1 2013, was down 14.5% from 18,943 companies in Q1 2012 and down 11% from 17,823 in Q4 2012.

“The underlying trend is arguably one of an improving picture. However, given the slight increase in distress compared to the previous quarter, it remains to be seen if we are out of the woods yet," Julie Palmer added.

"With business rate increases planned in April, HMRC’s new PAYE Real Time Information requirements coming into effect, and further minimum wage rises ahead there are still significant headwinds for the UK SME sector, which is typically less able to bear the burden of these changes than their larger counterparts.”

Leading the recovery with significant reductions in critical financial distress during the period are the Support Services and Professional Services sectors, which , decreased by 78% to 169 cases (Q1 2012: 760) and 63% to 66 cases (Q1 2012: 176), respectively year on year, or by7% from 181 in Q4 2012 and 14% from 77 in Q4 2012 respectively.

These findings are consistent with the latest Services PMI data for March 2013, which found that the UK Services sector recorded its best growth in seven months on the back of increased business confidence, with new business volumes at their highest levels since May 2012.

“Thanks to improving business confidence, increasing demand for advisory services and a revival of transactions, the support and professional services sectors are gaining momentum," Julie Palmer commented.

"The situation has certainly been helped by the fact that many of these businesses have reduced their cost bases significantly during the downturn such that any uptick in activity quickly improves their bottom line.

“This trend may also be a positive sign of what to expect from the GDP figures later this week, as the significant improvement in the UK Services sector could well push an otherwise flat market into growth territory, narrowly avoiding an unprecedented triple dip recession.”

Unseasonal weather and changing consumer habits have led to further struggles within many consumer facing sectors, with retail and leisure being among the worst losers this quarter. Companies experiencing critical financial distress in general retailing were up 24% (168 cases in Q1 2013 from 137 the equivalent quarter last year) while ‘Critical’ distress levels in the leisure sector increased 12% from 34 to 38 cases over the same period.

Conversely the bars and restaurants sector has improved the most amongst the consumer-facing sectors, with a decrease in critical financial distress of 10% to 135 cases compared to Q4 2012, and decreasing 66% when compared to Q1 2012.

“While most of the consumer-facing industries are still losing ground, blaming an extended winter on lower footfall and constrained sales of spring season goods, the bars and restaurants sector appears to be winning the race as consumers have switched to indoor spending closer to home rather than venturing out to more traditional visitor attractions," Palmer said.

“However, as a sector, bars and restaurants are certainly not out of the woods yet. Having already seen a considerable contraction in the number of operators following high rates of closure new Begbies Traynor analysis shows that businesses in the sector remain 2.5 times more likely to have adverse creditor actions against then than the average for companies across all sectors, inferring the fragility of this group.”

According to the Red Flag data, in Q1 2013 construction businesses experienced a 48% reduction in critical financial distress to 630 from 1,212 cases in Q1 2012. This positive trend is in stark contrast to the real estate sector, which during the equivalent period saw financial distress levels rise 24% to 227 cases nationwide (Q1 2012: 183).

“Greater Government support for the housebuilding sector and first-time buyers, combined with improving credit conditions from the banks, is helping to improve the fortunes of the construction industry," Palmer added

“However for the property management companies, lettings agents and landlords who fuel the real estate sector, recent reports of higher repossession rates and increased levels of tenants in severe arrears3 indicate that these businesses are now facing the consequences of the continued pressures on household finances .”

Ric Traynor, Executive Chairman of Begbies Traynor Group, concluded: “The 34% fall in critical distress levels across the UK is another welcome sign ahead of this week’s GDP announcement and indicates that the economy may have finally turned a corner, even if only to historically low levels of growth.

“The return to strength of the UK’s important business services sector is particularly encouraging for the whole economy but the ongoing lack of funding to the SME sector, which is a fundamental driver of the economy, remains the greatest obstacle to a stronger and sustained recovery.”

Join us on
Follow @freshbusiness