Business bankruptcies surge under impact of high interest rates

Today’s top stories

• Adobe abandoned its proposed $20bn acquisition of product design software company Figma, as there was “no clear path to receive necessary regulatory approvals” from UK and EU watchdogs.

• BP is pausing oil shipments through the Red Sea as Yemeni rebels’ attacks on vessels in the area threaten a vital route for global trade. Oil prices rose after the decision.

• The UK is to follow the EU with a levy on carbon-intensive imports from countries with weaker climate regulations. Iron, steel, ceramics and cement will be subject to the levy to reduce “carbon leakage” in which emissions are displaced to other countries.

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Good evening.

High borrowing costs and the end of pandemic lifelines for “zombie” companies are leading to a surge in corporate bankruptcies across the world’s advanced economies.

The number of US cases is up 30 per cent compared with last year, while in Germany, bankruptcies have risen 25 per cent. In the wider EU, corporate insolvencies are up 13 per cent, hitting their highest level in eight years.

The OECD said bankruptcy rates in several countries had surpassed levels during the 2008-2009 financial crisis, while in England and Wales, insolvencies have also hit their highest level since 2009. German financial services company Allianz forecast that global insolvency growth rates would hit 10 per cent next year after increasing 6 per cent in 2023.

Allianz said the labour-intensive hospitality, transportation and retail sectors had been hit the hardest, while industries that were more sensitive to interest rate rises, such as property and construction, were expected to come under strain too.

The surge in bankruptcies is likely to affect global economic activity and jobs growth in the next few years, analysts say, with healthy start-ups and small businesses being dragged down alongside the zombies under the impact of factors such as high energy prices and elevated borrowing costs.

Global investors on the other hand remain optimistic — buoyed by dovish signals from the US Federal Reserve last week — believing that the era of high interest rates is drawing to a close.

Whether rates are actually going to fall in the near future, however, is a moot point. Loretta Mester, a senior official at the US Federal Reserve, today tried to dampen expectations, arguing that markets had jumped “a little bit ahead”. She was echoed by Bank of England deputy governor Ben Broadbent who said the uncertain state of the UK’s labour market meant the bank could not yet safely conclude that inflation was on the slide and cut rates.

This is not the first time policymakers have felt the need to step in to calm investor exuberance. The problem, reckons columnist Rana Foroohar, is that markets are looking for simplistic yes or no answers to complicated questions. 

Next year, she argues, economic reality is likely to be even less binary and far more nuanced, with predictions based on old models no longer valid.

To take just one example: employment, wages and other key metrics in the post-pandemic era are refusing to follow historic trends. Add to that factors such as the disruption of traditional trade patterns as geopolitical tensions increase, the green transition and hot wars in Ukraine and Gaza, and it becomes clear that forecasting, today more than ever, is a mug’s game.

Need to know: UK and Europe economy

Despite today’s positive news on carbon leakage, the UK is still being targeted by climate campaigners who are taking legal action to stop the development of the Rosebank oilfield in the North Sea, arguing the project violates legal obligations on emissions. 

For the UK economy, 2023 was a story of near stagnation, with activity forecast to remain tepid into the new year as high borrowing costs and the legacy of surging inflation take their toll. “Given the UK’s low productivity, I suspect growth will be imperceptible for the rest of the decade,” said one economist.

German business morale fell more than expected in December, according to the closely watched Ifo index, adding to concerns that the eurozone’s largest economy could shrink for the second consecutive quarter at the end of 2023.

IMF chief Kristalina Georgieva told the Financial Times that delays in US and EU funds for Ukraine could jeopardise the country’s tentative economic recovery. A new package of EU sanctions against Russia should be agreed this week.

Need to know: global economy

The US raised concerns with Mexico over a wave of Chinese investment in the country including electric vehicle factories being built south of the US border by three of China’s biggest EV makers.

The shutdown of one of the world’s biggest copper mines in Panama has highlighted the challenge of securing the supply of raw materials needed for the green transition amid rising anti-mining sentiment, denying developing countries lucrative extraction projects.

An FT Big Read examines how the election in the Democratic Republic of Congo could pave the way to a mineral-driven boom that lifts millions out of poverty. The DRC sits on £24tn of untapped resources critical to the world’s green transition.

Africa overall, however, remains a problem for global economic growth, writes Ruchir Sharma, chair of Rockefeller International. The continent, now home to 1.5bn people, needs to find a way of employing workers more productively to capitalise on what should be a demographic dividend of healthy population growth, he writes.

Need to know: business

Ryanair has cemented its position as undisputed leader in European low-cost aviation after bouncing back from the pandemic. So much so that boss Michael O’Leary is on track to earn a €100mn bonus — one of the biggest in European corporate history — after the airline’s shares hit a record high.

Silicon Valley-based Zipline is to deliver medical supplies by drone for the UK’s NHS in a pioneering move that is meant to cut costs and improve services to hundreds of thousands of patients. The fixed-wing machines can travel up to 130 miles and parachute packages on to landing zones.

The world’s leading food and drinks companies are rushing to reduce their carbon footprint by tackling one of the hidden culprits of emissions: fertilisers. Crop nutrients underpin the production of half the world’s food but contribute significant CO₂ emissions at the same time.

Fancy speaker and television maker Bang & Olufsen said it could defy the slowdown hitting the luxury sector on the basis that “the rich will only become richer”. 

The world of work

The UK’s High Pay Centre said the country’s biggest companies were failing to close the gap between bosses’ pay and average earnings. At FTSE 100 groups, chief executives on average are paid 80 times the median salary of the country’s employees.

I’ve progressed fast at work — how do I go further? FT readers propose some answers to this week’s question to career expert Jonathan Black.

Mispronouncing a colleague’s name at work can be hazardous — and not just if it’s the boss, says columnist Pilita Clark.

Some good news

The US regulator’s approval of two gene therapies for sickle cell disease, including the first CRISPR-based treatment for any disorder, could be transformative for some of the disease’s 7.7mn sufferers worldwide.

Source: Economy - ft.com