A sluggish economy and rising operating costs will result in an increase in the number of American business bankruptcies this year, according to research by trade credit insurer Euler Hermes.
According to the report, in 2005, a 14 percent increase in bankruptcies was reported in anticipation of the Bankruptcy Abuse Prevention and Consumer Protection Act that went into effect in October 2005. Adjusting for the 2005 increase and rising business profits, in 2006, the Business Failures Index (BFI) dropped 30 percent to its lowest since 1980. For 2007, it is expected to increase almost 12 percent, which would return the BFI figures to levels more consistent with the U.S. economy.
The 12 percent rise is a result of dip in U.S. GDP growth from 3.3 percent in 2006 to 2.2 percent in 2007 and increased production costs and interest rates. Global GDP is also expected to slow; it will drop between 0.5 and 1 percent from 2006’s 3.7 percent to 3 percent in 2007, pushing the global BFI up 4 percent, the report said.
The report also notes that, in general, an increase in GDP of between 2 and 3 percent is necessary to offset rises in insolvencies. Conversely, if the GDP grows 1 percent or less, the region will see a 5 to 10 percent increase in insolvencies.
To illustrate, the report notes that from 1991 to 2005, the U.S. and UK saw insolvency rates cut in half and also saw GDP increases of 3.3 and 2.8 percent, respectively. Insolvency rates in France remained stable and Germany saw an insolvency increase of over 4 percent. France and Germany had GDP growth under 2 percent, with 1.9 percent and 1.3 percent growth, respectively. The 2007 insolvency rates in both countries are expected to remain unchanged from 2006 levels.
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