Global business failures expected to rise in 2007

Secured Lender, The, Nov/Dec 2006 by Cove, Brian P

After a substantial increase in 2005 and a decline in 2006, the number of business insolvencies in the U.S. is predicted to climb once again in 2007, according to global trade credit insurer Euler Hermes. Worldwide, the Index predicts that business failures will increase by three percent in 2007 on the heels of a global economic slowdown.

The Global Business Failure Index - created by Euler Hermes to compare business failures by country, going beyond the national definitions and taking into account the size of the respective global economies predicts an eight percent increase in U.S. corporate insolvencies for 2007. The Index has fluctuated quite a bit in the past two years, showing a 14 percent increase in 2005 and a five percent decrease for 2006.

The 2005 hike was caused by an increased number of business insolvencies in advance of the new bankruptcy laws, which took effect on November 17, 2005. However, the revamped Bankruptcy Code has caused a notable decrease in the number of corporate insolvencies for 2006, with the Index predicting a slight decrease in the number of businesses that will declare bankruptcy.

Dan North, Euler Hermes ACI chief economist, offered his view on the macroeconomic factors that can affect business failures: "The U.S. economy turned in a very strong performance in the first quarter as real Gross Domestic Product grew at a 5.6 percent annualized rate.

"However, GDP growth is expected to slow during the rest of the year as a result of three factors. First, the housing market, which has supported the U.S. economy over the past few years, is cooling off, providing less equity to finance consumer activity and reducing demand for household goods and services. Second, high energy prices, particularly for gasoline, are putting a drag on consumer activity. Third, and perhaps most importantly, the Federal Reserve may have tightened monetary policy too far as reflected in the inverted yield curve, a strong indicator of a future slowdown. The effects of Fed tightening lake a year or more to be felt, meaning that the U.S. economy will be experiencing a drag from rising interest rales for at least another 12 months. These three pressures on the U.S. economy will certainly put pressure on business failures throughout the next year."