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Insolvencies Are up, Hinting at Recession

Corporate insolvencies are on the rise, both in the United States and globally. Here’s what that says—and doesn’t say—about companies’ future prospects.

By Aaron Rutstein | November 06, 2019 at 04:30 PM

History has taught us that insolvencies act like the canary in the coal mine: Their rise typically precedes a recession. 2019 marks an inflection point of rising insolvencies in developed markets around the world, with Atradius economists predicting an increase of nearly 3 percent in 2019 and 1.2 percent in 2020. But this time, it’s not clear what the trend might foretell. Some of the major factors contributing to the current insolvency increase—notably, uncertainty over trade policy and Brexit—could be corrected during the next few months.

What is clear is that these are uncertain times, as business leaders everywhere anxiously await the next round of tariffs in the economic tit-for-tat between the United States and China. Brexit is another source of worry, as it’s anyone’s guess at this point how the final decision will play out.

Uncertainty is bad for business because it makes planning for the future difficult, leading executives to delay investments. This results in a self-inflicted spiral as businesses hold off on investments because of volatility, which leads to slower growth, higher unemployment, and increased insolvency activity—and then the process repeats.

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