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Interest rate rise could 'flush out' zombie contractors

A rise in interest rates could spell the end for ‘zombie’ construction firms across the UK, according to Begbies Traynor.

The latest quarterly figures released by the Office for National Statistics yesterday showed unemployment has fallen to 7.1 per cent, with the Bank of England now widely expected to increase interest rates before the general election in 2015.

The Bank of England has previously stated that it would consider a rise in interest rates if unemployment dropped to 7 per cent, though its governor Mark Carney last week said there was “no immediate need to increase interest rates”.

Speaking to Construction News before the ONS announcement, Begbies Traynor partner Julie Palmer said there were still concerns over ‘zombie’ businesses – those that are loss-making, or struggling to pay down their debts – despite a decline in the number of firms in ‘significant’ levels of financial distress in the construction industry.

Ms Palmer said that if interest rates were to go up, this would “flush out” some of these businesses.

“I do see construction businesses falling into this category of ‘zombie businesses’, particularly some of the subcontractors that are taking the risk on these deals,” Ms Palmer added.

Begbies Traynor’s red flag alert for Q4 2013 suggested that a “feel good” factor had returned to British business.

The report showed that levels of financial distress continued to decline in UK businesses during the fourth quarter of 2013. The report attributed this improvement to increased consumer and business confidence.

The figures also reported that the construction industry was the only sector to experience a fall (of 3 per cent) in ‘significant’ levels of distress compared with the same quarter of 2012. 

The residential sector was giving the industry a “huge boost”, Ms Palmer said.

The overall economic recovery was highlighted in the report, as levels of ‘critical’ distress in UK businesses fell 4 per cent from 3,044 in Q4 2012 to 2,933 in Q4 2013.

The report did, however, show ‘significant’ levels of distress were at a record high in Q4 2013 across the economy as a whole, especially for SMEs. Begbies Traynor attributed this to inexperienced management teams or limited credit availability.

Economic improvements also did not reach the whole of the UK, as the number of ‘critical’ problems in Scotland increased by 65 per cent from last year.

The biggest financial improvement came in the North-west, which saw a 16 per cent reduction in ‘critical’ distress.

Despite these regional concerns, Ms Palmer said she felt 2014 would continue to be another positive year for the construction sector.

“I don’t think there is going to be a slowdown,” she said. “I think the sector will continue to create its own upward momentum with the demand for residential property.

“There is no doubt that the residential side is giving that sector a huge boost at the moment, and it is also being helped by government’s Help to Buy scheme.

“We are struggling to build the amount of houses needed to cope with a growing population, and that is creating a lot of pent-up demand.”

The figures released by Begbies Traynor follow the latest survey from the Department for Business, Innovation and Skills Insolvency Service, which showed the number of construction firms that went into insolvency in England and Wales fell by 22 per cent in the third quarter of 2013.

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