Business failures fall to record lows

BUSINESS failures are expected to drop to six-year lows in 2004 - but economic pessimism will bring down more firms in the longer term.

The latest Industry Watch report from accountant BDO Stoy Hayward predicts 16,150 firms will go to the wall this year, down from 17,550 in 2003. The report is taken from Government data on liquidations and receiverships.

Although most sectors will see a drop in failures, the outlook is rosier for some areas than others.

The service sector remains dominant. BDO predicts 2,660 companies will collapse this year, down 21% on 2003, as the sector benefits from a surge in demand. Businesses keen to maintain an edge are expected to increase advertising and research spend, which is set to reduce the failure rate further to 0.7% in 2005.

The outlook is also good in manufacturing. Failures in the sector are set to drop from 2,440 in 2003 to 2,230 by the end of this year, their lowest level since current records began in 1993.

With the pound expected to weaken against the dollar and the euro, export markets should open up, cushioning businesses in the sector from the slowdown and keeping failures low at 2,150 in 2005.

Construction firms also enjoyed their best year since records began - but the end of the property boom will mean more companies go to the wall in the future.

The number of builders going bust will drop to 2,040 by the end of this year, falling further to 1,750 in 2005. But as fewer building projects are commissioned due to the stalling housing market, the strain will start to show and failures will climb 12% to 1,960 by the end of 2006.

Britain's popularity as a tourist destination and an increase in levels of corporate glad-handing will boost the leisure sector. Some 1,060 companies are expected to collapse, down from 1,120 in 2003.

But the reprieve will be short-lived as the slowdown in consumer spending is set to reduce demand for leisure services, says BDO. And interest rate rises will twist the knife as businesses cut non-essential spending. As a result, the number of failures will rise over the next two years to 1,130 in 2005 and 1,260 in 2006.

Shay Bannon at BDO Stoy Hayward said: 'Although the number of business failures is set to rise, they are still well below the levels of 10 years ago. And with interest rates unlikely to increase for the moment, there is little danger that this slowdown will evolve into a recession.'