Economic Outlook - As of January 2011

Overview

Insolvencies Have Started to Fall, But Still at a Modest Pace

2010 Estimate: The first fall in the Global Insolvency Index (-4%), after two record years of
increase

The Euler Hermes Global Insolvency Index (GII), which synthesizes business insolvency growth across the world, should post a noticeable decrease for 2010 (-4%, against -3%). This retreat, which reflects improved business finances, is explained mainly by the gradual recovery in the world economy, with real global GDP up by around 4% for the full year 2010, after a 2% contraction in 2009. It is also explained by the continuation of some support measures taken in a number of countries (tax cuts or moratoria, sectoral assistance measures, etc.) and by, lastly, the significant restructuring measures and flexibility that businesses themselves have adopted since 2009 in response to the economic and financial shocks of the crisis. This overall trend of reduced insolvencies is observed in more than half of the countries we have sampled, with a more marked fall in insolvencies in the areas that were the initial drivers of the global recovery: Asia Pacific (-12%) and, after two years of significant increase, the Americas (-8%). Europe, however, was marked by an overall less favorable and more heterogeneous situation, with business insolvencies still rising in a great number of countries in the north of Europe (Denmark and Ireland), as well as in the south (Greece, Portugal and Italy), the center (Belgium, Luxembourg and Switzerland) and to the east (Hungary, Russia, Poland and the Czech Republic) – enough increases to limit the scale of the fall in the Global Insolvency Index.

2011 Outlook: A continued fall in the number of cases (-5%) but a continued high insolvency level

The continued recovery in the world economy should allow the downtrend in insolvencies begun in 2010 to continue and also spread to a greater number of countries and to all parts of the globe. However, the slowing expected over 2011, with world GDP rising by a lower figure of 3% for the coming year, does threaten to limit the tempo of the downtrend, and the GII should post only a modest fall for 2011 (-5%). Some countries will be an exception to this, generally due to their particular economic environment (e.g., Greece, Ireland and Portugal) or else because of their low levels of insolvencies already posted in 2010 (notably in Asia). In this overall context, the cumulative fall in the GII over 2010 and 2011 will not prove great enough to outweigh the record increases posted in 2008 (+28%) and 2009 (+28%, after revisions). In other words, global insolvencies for 2011 will remain at a high level.

United States: A Still Limited Fall in Insolvencies

The clear recovery in the US economy, which started off vigorously in H2 2009 before losing a degree of impetus in Q2 and Q3 2010, unquestionably helped end the surge in business insolvencies at work since 2007 and which rose to a record 17- year peak in Q3 2009. However, the trend seen over the first three quarters of 2010, after the autumn 2009 peak, marked less a genuine trend reversal and more a stabilization at a high quarterly level of around 14,500 cases (against 13,200 on average since 1980 and against 9,000 over the past decade). The likely result for the full year 2010, with the number of cases dropping by around 7%, thus looks a little less favorable than our previously forecast 10% reduction– which we had expected in light of the massive support measures for the economy under the government’s recovery program and given the durably accommodating monetary policy in place. With more than 56,000 cases posted, insolvencies in 2010 will be nearly three times greater than in 2006 and well above the average of the past 30 years (7%). Moreover, 2010 will record a very small drop in the number of cases under Chapter 7, the procedure that is most widely used and which corresponds to business liquidation, and a larger decrease in the number of businesses benefiting from reorganization under the protection of Chapter 11. The scale of the biggest business insolvencies, in terms of their turnover, was nonetheless considerably lower than in 2009.

2011 Outlook: A further fall

The continuation of economic recovery in 2011, despite GDP growth slowing by half a percentage point against 2010, should consolidate the process of recovery in business profits begun in 2010 and be accompanied by a further drop in the number of business insolvencies. The drop is, however, likely to be still modest overall (-6%), given the relative weakness in household consumption, and with continuing difficulties, in particular, in those sectors that are more dependent on real estate and construction, for both of which sectors the end of the crisis is long in coming. The total number of insolvencies in 2011 could be close to 53,000 cases, which would constitute a cumulative drop of 13% against the 2009 peak.