Euler Hermes Predicts Increase in World Business Failures During 2006

As a result of the slowdown in the world economy (just 3% growth), 2005 shows a clear change in the trend of business casualties. The Global Index of Business Failures created by Euler Hermes credit insurance is thus expected to rise by 1% next year.

(PRWEB) December 1, 2005 -- As a result of the slowdown in the world economy (just 3% growth), 2005 shows a clear change in the trend of business casualties. The Global Index of Business Failures created by Euler Hermes credit insurance is thus expected to rise by 1% next year.

2006: business failures start to climb again in the countries that drive the world economy

Following a slowdown in the reduction of business failures during 2005, the Global Failures Index (GFI) suggests an increase in casualties during 2006 in the main industrialized countries: Germany (+4%), the UK (+3%), the USA (+3%) and Japan (+2%) should thus see an increase in bankruptcy filings.

The trend reversal is linked in particular to the USA, where the destruction caused by hurricane Katrina and the slowdown in economic growth will probably cause a rise in business failures in 2006, for the first time since 2001.

After two years of stable or decreasing failure rates, the forecasts for business failures in Japan and Germany are not encouraging for the year ahead: casualties are likely to climb by 2% in Japan and by 4% in Germany. This deterioration is the direct consequence of the mediocre levels of growth achieved in these two countries (1.5% in Japan and 1.4% in Germany).

In Europe lack of sufficient growth has resulted in a steady failure rate for the past two years, maintaining the record level reached at the end of 2003.

The world slow-down that began in 2005 will continue in 2006

After a record 4% in 2004, world growth forecasts show a fall to 3.2% in 2005 and 2.8% in 2006. This erosion is chiefly explained by the slow-down in the US economy, which accounts for nearly a third of world GDP. After peaking at 4.2% in 2004, the USA lost 0.7 growth points in 2005 when it only reached 3.5%, and estimates for 2006 show a further decrease in growth of 0.8 points down to 2.7%.

Parallel to this drop, the euro zone should see a surge in activity, in spite of growth figures that are still too modest to reduce the number of business failures: growth is expected to climb from 1.4% in 2005 to 1.7% in 2006.

Thus, with a slowdown in the American economy and growth beginning again in the euro zone, we could see a convergence of the growth levels in the two blocks, especially if the anticipated fall of the euro against the dollar in 2006-2007 is confirmed.

United States: a new and more severe law and the impact of Katrina may encourage bankruptcy filings in 2006

The fall in American business failures that we have seen since 2001 continued during the first half of 2005. From 40,000 cases in 2001 the numbers dropped steadily to 32,400 at the end of the second quarter of 2005 in annual terms (-9% over the same period the previous year), which is the lowest level for 25 years. Nevertheless a number of events threaten to break this trend or at least upset the statistics.

For a start, the amendments to the bankruptcy law came into force on 17 October 2005, making Chapter 11 conditions weigh more heavily on debtors. For this reason some businesses (airlines, car equipment manufacturers), starting with the biggest, applied for Chapter 11 protection during the third quarter, just before the change came into force. Secondly, the impact of Katrina has without doubt accelerated the collapse of local businesses and will weaken the financial situation of numerous companies and small businesses.

After US Airways in 2004, among the biggest failures are Delta Airlines and Northwest, respectively no. 3 and no. 4 in US air transport, which both filed for bankruptcy in September. Difficulties are piling up in the American car industry, (an increasingly heavy bill for wages, pension funds and social security cover) as is shown by the failure in October of Delphi, the biggest parts manufacturer (28.6 billion dollars turnover). Echoing the slow-down in the economy and the repercussions of Katrina, failures will probably increase by 3% in 2006.

The full analysis of this study can be found in Economic Bulletin Economique No. 1105, available on request from Euler Hermes ACI.

Euler Hermes is the worldwide leader in credit insurance and one of the leaders in bonding and guarantees. With 5,400 employees in 40 countries, Euler Hermes offers a complete range of services for the management of customer receivables and posted a consolidated turnover of 1.9 billion euros in 2004. The North American subsidiary (Euler Hermes ACI) is headquartered in Owings Mills, MD. For more information visit www.eulerhermes.com/usa.Euler Hermes, a subsidiary of AGF and a member of Allianz, is listed on Euronext Paris. Standard & Poor’s rates the group and its principal credit insurance subsidiaries AA-.

Press Contact:
Rick Ostopowicz
Euler Hermes ACI Public Relations and Communications Specialist
Phone: (410) 753-0652

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