Wave of bankruptcies hits the country with full force

The weak economic development combined with persistently high costs is causing the number of bankruptcies in Germany to rise sharply. The credit agency Creditreform has registered around 11,000 company bankruptcies for the first half of 2024 – more than at any time in almost ten years.

“Companies are continuing to battle the effects of the recession in 2023, ongoing crises and the weak economic development this year,” says Patrik-Ludwig Hantzsch, head of economic research at Creditreform. “All of this combined is breaking the necks of many companies.”

The dynamics of the insolvency situation have increased significantly again. While there was already an increase of 17.2 percent in 2023 as a whole, the rate of increase in the first six months of this year is almost 30 percent higher than in the same period last year. “The increase is not only continuing, it is even accelerating,” describes Hantzsch.

The damage is correspondingly high. Creditreform estimates the bad debts for suppliers, lenders and social insurance providers at around 19 billion euros, which is six billion euros more than in the first half of 2023. And the number of jobs at risk has also increased again – by 6.4 percent to 133,000.

The main reason for this development is the significant increase in the number of cases among large companies, i.e. companies with at least 250 employees. According to the statistics, the number has doubled from 40 to 80 and is therefore “far above the normal level of recent years,” according to Creditreform. The most prominent cases are the department store chain Galeria Karstadt Kaufhof and the travel company FTI-Touristik.

Although this class of company still accounts for the smallest part of all insolvencies, the large-scale bankruptcies are more significant than the insolvencies of small businesses with fewer than ten employees. Even in these cases, the damage is relatively greater. “The effects of a company going bankrupt are currently significantly greater than, for example, during the global financial crisis in 2009,” says expert Hantzsch.

The economy is affected across the board. Creditreform is reporting significantly more insolvencies in all major economic sectors: in retail, the increase is a good 20 percent, in manufacturing 21.5 percent, in the construction industry 27.5 percent and in the service sector almost 35 percent.

The latter now accounts for almost two thirds of the total volume. “The particularly significant growth in the services sector shows that the industry is severely affected by the recession,” explains economic researcher Hantzsch, who says that a new ten-year high has now been reached in this economic sector.

The insolvency rate in the services sector is also above the average of 71, with 74 bankruptcies per 10,000 companies. However, the half-year rate in the construction sector is even higher, rising from 77 in the first six months of 2023 to 98 now. This figure also reflects the problems of the real estate industry.

“The industry continues to struggle with high interest rates and rising construction costs,” says Christoph Niering, insolvency administrator and chairman of the Professional Association of Insolvency Administrators and Trustees in Germany (VID). “The ongoing pressure on stationary retail and the continuing trend towards mobile working also means that a rapid recovery in demand for commercial real estate projects is unlikely. This is putting many companies in further existential difficulties.”

But it is not only there that an improvement in the situation seems far from over. Creditreform, in any case, sees the increase in insolvencies far from over. “Economic development in Germany is likely to be weak in 2024. Together with the still high interest rates, corporate financing remains a real challenge,” explains Hantzsch. “Because many companies have a debt problem and can hardly meet their payment obligations from their own financial resources due to the poor economic situation.”

The European Central Bank has recently implemented the announced interest rate turnaround. “The number of corporate insolvencies is nevertheless likely to continue to rise until the end of the year and then exceed the pre-coronavirus level for the first time,” predicts Hantzsch. “Corporate stability in Germany is currently more shaky than it has been for many years.”

Atradius’ assessment of the situation also fits in with this. According to the credit insurer, half of the companies in this country are now struggling with payment problems from customers. But this also weakens their own stability. “We expect the financial situation of German companies to deteriorate further in 2024,” says Thomas Langen, who is responsible for the credit insurance business in Germany and Central and Eastern Europe at Atradius. “Delayed payments and liquidity problems are tending to increase.”

At the same time, according to a recent survey by Atradius of 500 companies from 15 industries, almost half of the companies are suffering from a decline in incoming orders. “Economic downturn, inflation, geopolitical risks and high energy costs are a toxic mix for the domestic economy,” says Langen. “These results are alarming.” Because they illustrate the pressure that many companies are currently under. “The economic uncertainties are forcing many to take measures to maintain competitiveness and financial stability.”

Around 40 percent are focusing on efficiency improvements or postponing or stopping investments. However, this will only further reduce competitiveness and endanger new business when the global economy expands in 2025 and beyond.

According to the survey, other measures include job cuts or short-time work, but also the development of new products or services. Although German industry in particular is well managed and accordingly resilient, Langen praises. Nevertheless, there is currently not much to suggest a short-term return to the path to success. “Germany as a business location is in a full-blown slump.”

However, the sharp rise in the number of bankruptcies is only one aspect of the currently tense economic situation in Germany. “We continue to see many silent business closures, even outside of insolvency,” reports VID boss Niering from his consulting practice.

This trend is also confirmed by the latest closure report from Creditreform and the Leibniz Centre for European Economic Research (ZEW). According to it, around 176,000 companies disappeared from the market in 2023. And only eleven percent of these closures were the result of insolvency. An increasing number of industrial companies have given up quietly.