U.S. Business Bankruptcies to Increase by 12% in 2007

The nation’s continued economic slowdown – coupled with increased costs of doing business – will cause the number of American business bankruptcies to rise this year. Following a business failures rate in 2006 that was the nation’s lowest since 1980, the number should rise by approximately 12% in 2007 according to analysis from global trade credit insurer and accounts receivable management service provider Euler Hermes ACI.

In 2006, the Euler Hermes Business Failures Index (BFI) registered a 30% decline in business bankruptcies. However, this in fact was only a correction for the exceptional 14% surge in insolvencies from 2005 – an increase due mainly to action by many businesses that were anticipating the new bankruptcy laws that took effect in October 2005. Thus, the figures for the first nine months of 2006 showed 14,529 failures, down by 45% from the same period in 2005. In addition, business profits have been surprisingly good in recent quarters and were expected to rise by more than 15% for 2006, which also helped to trim the number of business bankruptcies.

The exceptional impact of the changed bankruptcy legislation on the number of business failures should gradually blur throughout 2007, and the BFI figures should return to a trend more consistent with the U.S. economy and with the financial state of businesses. The slowdown in economic activity should limit U.S. GDP growth to approximately 2.2% in 2007 – as opposed to 3.3% in 2006 – while the increased production costs and impact of higher interest rates will weigh on business profits. As a result, the BFI should rise by 12% for the United States this year.

Globally, the outlook for 2007 is less promising than that of 2006, given the worsening cyclical economic picture. GDP growth should slow by between 0.5% to 1.0% in most countries, taking world growth from 3.7% in 2006 to 3.0% in 2007. Overall, the global BFI figure – based on forecasts for the 33 countries in the study that account for 83% of the world GDP – should increase by 4% in 2007.

The full BFI data will be published in the upcoming Euler Hermes Insolvency Outlook publication, which is available upon request.