It's not technically that far yet, but it shouldn't be long before Germany is "officially" in a recession. According to many economists, the country is facing a major wave of bankruptcies. Young, innovative companies in particular are acutely threatened by a lack of reserves, high energy prices and the slump in demand. But does this forecast stand up to closer scrutiny?

Among other things, the insolvencies of partnerships and corporations, which increased significantly as recently as September, are cited as evidence for the thesis of the wave of bankruptcies. In this period, the number had risen by 34 percent to 762 compared to the same month last year.

Most recently, a major wave of bankruptcies was expected during and after the lockdowns in the Corona pandemic. This has not happened. On the contrary, we have been in a phase of historically low insolvency figures for some time now. In fact, 2021 marks the lowest level since 1993. In the period from 1999 to 2021, an annual average of around 28,000 companies filed for insolvency, while last year it was around 14,000. Even if this figure doubles in the coming months, it will only reach the average level of previous years. So, there can hardly be any talk of a "wave".

Special factors have concealed the necessary structural change

When all of this is taken into account, there is no doubt that the numbers will increase significantly in the coming weeks and months. The reasons are manifold. They can be summed up in the formula "special factors plus structural change meets interest rate turnaround".

The special factors include, for example, the Corona pandemic, but also the Ukraine war. Despite all the difficulties for the companies, they have initially had a positive economic impact, to the extent that they have now successfully masked the demands of structural change for years. Which requirements are these? On the one hand, the conversion to a climate-friendly economic and business model, and on the other hand, the digital transformation, which has been effective for years and also goes hand in hand with the change of business models as a whole.

But let's take it one step at a time: How do the various causes interlock step by step?

The special factors already mentioned, mainly the Corona crisis, initially caused a demand shock worldwide. This was largely compensated for in Germany, but also in other countries, by government support programmes. At the same time, the COVID-related supply chain shock dramatically tightened supply. This shortage caused prices to rise while demand remained unchanged. Pointing to the disrupted supply chains and because it was crucial for most demanders to receive any goods at all, the price increase was also easily enforceable in the market. This causal chain led to a situation in which most companies have so far largely been able to achieve stable results.

The interest rate turnaround marks the turning point

The FED's forced interest rate policy and the ECB's recent interest rate decisions mark the decisive turning point in this development. With the hard withdrawal of the loose monetary policy within a short period of time as a means of fighting inflation, interest rates have already risen significantly this year. In addition, the effects of the Ukraine war (energy shortage, rising prices, inflation) and the escalation in China have significantly increased risk awareness in business and politics, but also among consumers. As a result, there is a collapse in demand, similar to that at the beginning of the Corona pandemic. Unlike the situation at the beginning of the pandemic, when the collapse in demand was almost completely compensated by the state in a deflationary environment, the current decline in demand is only flanked by targeted state support. This is aimed less at compensating for demand than at containing the inflationary environment. In the face of great global political uncertainty and also as a result of inflation, people prefer to keep their money together rather than spend it.

This reluctance to buy is now coming up against supply chains that are gradually functioning again - with the consequence that in future prices can no longer be passed on unfiltered to the end customer. With a simultaneous increase in the cost base, companies will increasingly be confronted with falling margins and results, also because they have little or only limited price enforcement power and because it is not possible to switch to other markets. In addition, structural costs will continue to rise, for example in the course of digitalisation and due to climate protection requirements.

This time it could hit the backbone of the German economy

Concern about the future of Germany as a business location is therefore not unfounded. Because I am convinced that this time, unlike in the past, a very specific group of companies will be hit particularly hard. A look at the insolvency figures of the past ten years shows that statistically just under half of the insolvent companies belonged to the service sector, followed by 20 percent from trade and about 8 percent from manufacturing. Nine out of ten affected companies had up to 10 employees, only 40 percent of the companies were older than ten years.

This structure is likely to change significantly in the coming months. For example, we expect massive insolvencies increase in the manufacturing sector as well as among companies that are more than ten years old - and thus at the heart of the German SME sector. Because these companies have the most employees in Germany, there could be significant job losses.

The development is also worrying from a restructuring perspective. Although we now have a whole range of good tools at our disposal for judicial and extrajudicial restructuring, the number of company liquidations will continue to rise. Among other things, there is a lack of fixed parameters to guide the parties involved - including the banks - in the increasingly complex restructuring process. The risk: many of the jobs threatened by insolvency will not be saved this time. The risk of a creeping deindustrialisation of Germany can thus no longer be dismissed out of hand.

Speaking of banks. For them, the development is both a curse and a blessing. On the one hand, write-offs on loan commitments will increase significantly, which will have a negative impact on margins. On the other hand, the rise in interest rates will have a positive effect. Whether the overall development will have a positive or negative impact is not yet foreseeable. What does seem clear, however, is that the new credit commitment of the banks is likely to develop more selectively. This will make restructuring even more difficult and require a stronger commitment of the shareholders. If this does not happen, insolvency will ultimately be the more likely option for many companies than out-of-court restructuring.

How can politics provide support in this situation? In my opinion, there should be rethink on the political stage about its ambitious climate targets, among other things, in order to give companies time to overcome the current crisis. Afterwards, extensive structural investments are on the agenda, which by no means all will be able to cope with. Policymakers should provide greater relief for small and medium-sized companies in particular for the implementation of climate protection measures through special subsidy programmes. Non-repayable grants are more effective than traditional loans.

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