Two sectors are driving the wave of bankruptcies in Europe

The European Commission recently published data on the number of EU businesses that had declared themselves bankrupt in Q4 2022, and the story it told was pretty alarming. Not only had the number of bankruptcy declarations increased during all four quarters of 2022, the number rose by 26.8% between Q3 and Q4, reaching the highest levels since data started being collected in 2015:

The macroeconomic context is clearly very tough across Europe, but these numbers are still surprisingly bad. Is it possible to pinpoint the main factors driving this volume of business failures?

A useful starting point is to look at the picture sector-by-sector, because the situation varies significantly in different parts of the economy. The European Commission benchmarks the number of bankruptcy declarations based on 2015 figures, where 2015 = 100 (above 100 therefore means that the situation in the sector has worsened since 2015; below 100 and the situation is more positive):

It is therefore clear that, while the situation is not good across the board, with bankruptcies up more than 50% between Q1 and Q4, two sectors above all others drove the wave of bankruptcies that we saw in Q4: Transportation & Storage, where the number of bankruptcies more than doubled over the course of last year, and Accommodation & Food Services, where bankruptcies were up 78% between Q1 and Q4.

Why these two sectors specifically?

A first thought we had was that these might be particularly small-business-dominated sectors, and small companies are probably less resilient to macroeconomic headwinds than larger firms. But while it’s true that Transportation & Storage and Accommodation & Food Services are both SME-dominated, they actually aren’t unusual in that – the entire European economy is the same:

So that’s not it.

Instead, if you dig into the numbers in more detail, you realise very quickly that there are major discrepancies between different member states, which suggests that, even if some of the challenges businesses are facing are the same (or at least similar) from country to country, local dynamics are also likely to be playing an important role.

To emphasise that, when you look at our two focus sectors – Transportation & Storage and Accommodation & Food Services – two countries appear at the top of both lists when it comes to the growth of bankruptcy declarations in 2022: Spain (top of the list for companies in the Transportation & Storage sector, second for bankruptcies in the Accommodation & Food Services sector) and Hungary (first for Accommodation & Food Services, second for Transportation & Storage).

Spain and Hungary are very different countries. In Hungary, the inflation rate is currently higher than anywhere else in the EU, which has put huge pressure on almost every company. Was the panic-buying and long queues at petrol stations prior to the government’s scrapping of the fuel price cap in December the final straw for transport companies that were already struggling? Was the failure of Hungary’s tourism industry to recover to pre-COVID levels the primary issue in the Accommodation & Food Services sector?

But what about Spain, where the inflation rate might be high by historical standards, but is much lower than it was in the middle of last year and, right now, is near the bottom of the European league table – and where all-important revenues from tourism have already reached pre-crisis levels?

It’s a complex picture that resists easy conclusions. The only thing that is clear is the human impact of business failures on this scale – and the political pressure it puts on governments to prevent the situation from getting even worse.