It’s official, the European locomotive is on the path to recession. According to the German government’s own estimates, 2024 is expected to end in economic contraction with a decline of 0.2%, worsening the negative 0.1% in 2023. The weak economy its industry plagued by high interest rates and the weakening of external demand has already become chronic and, even if wages and consumption hold up, the reality is that the central European nation is in difficulty. In this context, a hidden threat begins to emerge more strongly than ever in its economy: a wave of bankruptcies which accelerates the decline of its economy.
Bankruptcies, which rise steadily as the economy weakens, are a constant. But it is no longer small businesses that will bid. The “uglier” side of the crisis now begins to emerge in large companies, the fall of which has already had a significant impact in the vast network of SMEs and ETIs which support the German industrial fabric. One of the last to sound the alarm was Landwarme, an already larger biomethane company.
This happened in August but on the same September 30, the automotive supplier VKW, with more than 3,000 employees and 560 million euros billing, declared bankruptcy due to inability to meet its creditors. Just a few months ago, the giant FTI Tourist He also made the same decision. The historic department store Kaufhof and the textile giant Esprit have also closed their doors.
These cases are living proof of statistics released by German statistical agency Destatis, which showed that bankruptcies skyrocketed in July to their highest level in a decade, 1,406 in a single month. Steffen Müller, head of insolvency research at the IWH, said he expected the figures to fall slightly in August and then increase again in September. But the most relevant data is that 10% of these processes concerned large companies (with a turnover above 50 million euros).
Allianz was very negative about these figures, saying that the bankruptcy festival could have started. In its latest report, the German bank indicated that it hoped that in 2024 the competitions climb 21% to 21,500 cases. Far from slowing down, as the experts seemed to indicate after the bad figures for 2023, more and more blinds are falling permanently in the economic heart of the old continent. In fact, Allianz experts estimate that in 2025 this number will continue to grow, this time by 2%, up to 22,000 cases.
“The largest companies going bankrupt increased by 33% and when something collapses, it does so with force”
The German entity emphasizes that it is not so much the problem of the number itself as of the economic damage, since now the largest companies are starting to fall, which will lead to a “domino effect” that could be the last bad news for the weakened German economy. “The largest companies going bankrupt increased by 33% and when something collapses, it happens with force”, comments Milo Bogaerts, director of Allianz Trade in Germany, Austria and Switzerland. In this sense, the expert emphasizes that we have probably entered a loop in which ” “Large bankruptcies have a domino effect on companies throughout their supply chain, leading in turn to more bankruptcies.” A loop that conspires against Germany’s industrial fabric.
One of the major problems comes, in this sense, from the industrial and commercial distribution of Germany. The bulk of the country’s employment and economy is supported by the Mittelstand, medium and small businesses, which represent 60% and almost 52% of GDP, according to the country’s Finance Ministry. In this sense, these companies live largely from exports (60% sell abroad) or from supplying large companies on the local territory. High interest rates have already affected these types of businesses and, if large companies start to go bankrupt, Middle East that orbit next to it can fall, causing a snowball effect.
Allianz experts believe this could be the key factor that pushed Germany into recession. “LBankruptcies in Germany have never increased so quickly“which suggests” a gloomy economic outlook. It will be a lost year economically.” Jonas Eckhard, an expert in bankruptcy proceedings at FalkenSteg, said he also expects a rebound in bankruptcies in the second half of the year. What the expert defined as “a storm of bankruptcies”.
Why are they going bankrupt?
“Companies are still struggling with the effects of the 2023 recession, current crises and this year’s weak economic development,” says Patrik-Ludwig Hantzsch, head of economic research at Creditreform. This company defends in a recent report that the increase in bankruptcies will cause damage to suppliers, lenders and insurance companies due to value of 19,000 million euros. This is 6 billion euros more than in the first half of 2023. Expert Hantzsch cites the significantly higher number of large bankruptcies as the reason for this jump.
These companies have been struggling for years. With rising energy prices under siege to their profits, inflation following the same line and… all because of a supply crisis and the pandemic. To make matters worse, they discovered a recession in 2023 that hit its outlook and interest rates that made their debt more expensive. From Creditreform they explain that these high rates have made these companies lose all their balls to save themselves from bankruptcy, because “they make the acquisition of riskier companies unattractive.” At the same time, “uncertain sales due to the economic situation have deterred investors.”
Bundesbank: “Corporate bankruptcies are likely to increase, credit risk is likely to increase”
From BCA Research they commented that the torrent of lowered blinds came because in the face of “a monetary policy that continues to be restrictive, a labor market that is deteriorating and capital investments remain weak”.bankruptcies are increasing rapidly.” This, combined with the collapse in construction activity, is “limiting the national economy.”
In addition to the impact on economic activity itself, Deutsche Bank emphasizes that certain bankruptcies croissant this will in turn have an impact on German banks. “With the increase in business bankruptcies, will impact entities in Germany“The Bundesbank has been anticipating this scenario for months and asked companies at the beginning of the year to use the profits it brought them to increase their liquidity in the face of corporate insolvencies.”
“In all likelihood, given the structural change that we’re experiencing and the uncertainty that surrounds us, corporate insolvencies are likely to increase, credit risk is likely to increase, and that’s why we on both sides of the macroprudential side and microprudential side, side, really We make banks aware of these risks and we urge them to increase their resilience as much as possible,” commented Vice President Claudia Buch.
It’s not just Germany
Although a wave of bankruptcies in Germany in itself puts Europe in a complicated situation, the reality is that the rest of the continent is not immune to this problem and in fact, Schroders analysts have pointed out that It is one of the big problems under the carpet of the European economy since covid, still without response.
Claudia Aquino, an analyst at Scope Ratings, explained in a recent report that the retail sector in Europe is being disrupted by many trends. “Withdrawal of support for the pandemic and the energy crisis has led to an increase in bankruptcies in the sector, highlighting the artificial stability of yesteryear.” “After the end of state support, ‘zombie retailers’ risk going bankrupt.” is the one who suffers the most from this problem, accounting for 57% of insolvencies across the continent.
“Credit risk remains elevated in the European retail sector this year, particularly in the discretionary goods segment, with no signs that last year’s upward trend in business bankruptcies would reverse in 2024 after the increase in defaults in the first quarter,” the agency said. According to Eurostat figures for the second quarter of the year, bankruptcies increased by 3.1% year-on-year, set a new historical record and 4.4% quarterly.
“Western Europe remains a major contributor to this global increase in corporate insolvencies, despite a slight slowdown“They comment on Allianz, to which they add that they see a similar problem with the German case. “The worrying factor is an increase in insolvencies among large companies which could generate an increase in unpaid debts among small suppliers.”
