THE number of Scottish construction companies showing advanced signs of financial distress spiked in the second quarter, a key survey reveals.
Corporate recovery and insolvency specialist Begbies Traynor, publishing its latest Red Flag Alert, says this jump “highlights the downturn being faced by the sector”, and warned of the potential knock-on impact on suppliers and sub-contractors.
The survey shows a quadrupling of the number of construction businesses in Scotland in “critical distress” between the first and second quarters of this year, from five to 20. The “critical distress” definition refers to businesses which have had winding-up petitions or decrees totalling more than £5,000 against them.
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Begbies Traynor noted that, comparing the second quarter with the same period of last year, the number of Scottish construction companies in critical distress was up by 18%.
Ken Pattullo, who leads Begbies Traynor in Scotland, said: “These latest figures reinforce the slowdown in the construction sector which we have been seeing, borne out by the recent construction insolvencies here.
“The quarter-on-quarter increase in advanced or ‘critical’ distress is particularly stark, and doesn’t bode well either for construction firms or for the many other businesses, such as suppliers and sub-contractors, which depend on them.”
Figures published last month by the Scottish Government show construction output north of the Border has fallen for nine consecutive quarters.
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The Scottish Government said of the fall: “Activity has returned to more normal levels following a period of exceptionally high growth during 2014 and 2015.”
The seasonally adjusted figures show Scottish construction output in the first quarter was down by 3.5% on the final three months of last year. Comparing the first quarter with the opening three months of 2017, Scottish construction output was down by 9.2%.
UK construction output in the first quarter was down by 0.8% on the final three months of last year.
The ONS, publishing UK quarterly national accounts late last month, said of the first-quarter figures: “While there is some evidence of an impact from the bad weather on this industry, our initial analysis shows weakness in construction throughout the quarter, not just the period during the bad weather.”
Accountancy firm PricewaterhouseCoopers last week highlighted construction sector weakness as it published its latest UK forecasts, noting the impact of Brexit-related uncertainty.
PwC chief economist John Hawksworth said: “Construction has obviously been very weak over the last year or so, both in Scotland and the UK. There have been some areas like commercial construction that are affected by Brexit uncertainty – some big-ticket [things].”
Begbies Traynor’s Red Flag Alert shows that, across the Scottish economy as a whole, there has been a 77% jump in the number of companies in critical distress between the first and second quarters, from 44 to 78. The corresponding figure for the second quarter of last year was 61, so there has been a 28% year-on-year rise in the three months to June.
The 77% quarter-on-quarter jump in Scotland in the three months to June is much sharper than a corresponding 10% rise for the UK as a whole.
Contemplating the outlook, Mr Pattullo said: “With continued uncertainty about the impact of Brexit, together with consumers feeling a squeeze on household incomes, showing no sign of abating, this lack of confidence is likely to keep the economy in the doldrums.”
The number of companies in Scotland facing less advanced “significant” distress in the second quarter was, at 24,905, down by 1% on the opening three months of this year. However, it was up by 9% from 22,866 in the same period of 2017.
Begbies Traynor said the sectors experiencing the greatest year-on-year increase in the number of companies in Scotland facing “significant distress” were printing, which showed a 7% jump, and travel and tourism, with a 4% rise.
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Utilities and professional services each saw year-on-year drops of 5% in the number of companies in significant distress in the second quarter. In financial services, there was a 4% year-on-year decline in the number of companies in significant distress, while manufacturing and support services saw 2% falls.
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