Sector activity remains subdued
Compared with before the financial crisis, activity in the transport, storage & communications sector remains subdued.
Despite this, formal default numbers have fallen. However, the on-going weakness of the economy and a slowdown in the telecommunications sector could push up insolvencies in 2013.
Growth in the transport, storage & communications sector is closely correlated with overall economic growth. When the economy is growing, more goods are delivered as businesses build up inventories of goods and service to sell – which is good news for firms in the business of transport and storage. During a downturn, inventory destocking among businesses curtails growth in the transport sector. Similarly, demand for communication technology is also closely related to business activity.
Economic output in the transport, storage & communications sector based on ONS data. Output in the sector saw a peak-to-trough decline of 10.1% during the financial crisis. Despite a recovery since the 2009 trough, output remains 5.2% below the pre-crisis peak according to the latest (November 2012) data. And, as figure 6 shows, year-on-year output growth in the sector has veered into negative territory in recent months.
Despite this economic weakness, insolvency numbers in the transport, storage & communications sector fell sharply last year. Data from the Insolvency Service for Q3 2012 show insolvency numbers 21.7% lower than a year ago and we predict that, for the year as a whole, insolvencies are now likely to be 17.2% lower than a year ago. Insolvency numbers in Q3 2012 were even 28.3% lower than in Q3 2007, meaning that business failures in the sector are now lower than just before the UK entered recession in 2008.
These insolvency figures are somewhat at odds with the headline economic situation – with the UK economy showing zero growth last year and output in the transport, storage & communications sector well below its pre-crisis peak. Subsequent analysis in this report shows that the latest business performance data suggest a rise in default numbers in 2013 is likely. Our central forecast is for the number of defaults in the sector to rise from about 730 last year to about 830 this year, with formal default numbers falling again from 2014 onwards.