An analysis of the most pressing concerns based on insights from 1,000 UK business leaders.
Author: Tim Chance
The immediate economic outlook for 2025 continues to be marked by a mix of cautious optimism and persistent financial challenges. As anticipated in last year’s Year Ahead report, the recovery — so far — has been slow.
Five years on from the start of the pandemic some fallout is still expected. Enterprises with tighter cash reserves are more susceptible to economic volatility against a backdrop of COVID-related debt and the strain of materials and labour inflation.
The IMF has raised the UK’s growth outlook to 1.1% for the year, up from its previous forecast of 0.7%, but had not changed its outlook from 1.5% for 2025, indicative of the slow speed of the economic recovery.
There's no question there's a lag from the pandemic, predominantly in the sectors we've seen affected this year, such as construction and retail. However, the hope is that towards the second half of 2025, there might be an uptick in growth.
More insolvencies expected for debt-laden firms
Many UK businesses will continue to face balance sheet pressures. The impact of the energy crisis, rising raw material costs, wage inflation and withdrawal of COVID-era fiscal support has kept interest rates high and placed those in debt under pressure.
Although interest rates are starting to come down, with the Bank of England cutting the base rate to 4.75% in November 2024, there will be continued pressure on the financial borrowing market through the first half of 2025 and beyond.
Many remaining 'zombie' companies fell to the wayside during 2024. These companies, which were making just enough money to continue operating but not to invest in growth during the prolonged low-interest-rate environment, could no longer service their debt once rates rose and the government support measures came to an end.
Some giants also toppled during 2024. In September 2024, a major construction group went into administration with debts over £1 billion. The collapse, likened to the 2018 Carillion bankruptcy, left 2,200 workers unemployed and threatened the cash flow of smaller subcontractors in its supply chain. Similar events have occurred in other sectors.
The domino effect of a major insolvency can be felt for some time and as such, it is expected the failures in 2024 could cause more business insolvencies over the coming year. The number of firms facing 'significant' financial distress was up by 5% in Q3 2024 to 632,756 businesses. Construction and real estate businesses were among the sectors most impacted1.
Green shoots for 2025 as government targets home building
While the economic environment remains somewhat disheartening, government-led initiatives, particularly in housing and infrastructure development, offer glimmers of hope. In the 2024 Budget, the government allocated £5 billion for housing in 2025-20262 with Prime Minister Keir Starmer pledging to deliver 1.5 million homes before the next election.
We know the Labour government is really focused on building homes. This will help massively in the construction sector and is one of the green shoots amid all the other challenges.
The emphasis on home building will provide a cushion for industries like construction, with benefits extending to material suppliers and subcontractors, generating new contracts and jobs.
However, sectors reliant on consumer spending, or with significant exposure to international trade, may continue to struggle.
Policy landscape and economic measures
Economic policies introduced by the government are aimed at stimulating growth and stabilising industries vulnerable to shocks. Yet, the practical impact of these measures on company balance sheets remains mixed.
The climb in bad debts and late payments has created a ripple effect that affects supply chains, creditors and trade credit insurance providers.
At the same time, tighter regulatory scrutiny and economic reforms could pose a strain for businesses with more limited financial flexibility and compliance resources. The landscape remains dynamic, requiring businesses to stay vigilant and adapt their credit strategies accordingly.
Firms should proactively manage credit exposure and seek balance sheet protection
Businesses that prioritise robust credit control measures and regularly update their risk assessments will be better positioned to anticipate potential disruptions in the year ahead. Enhanced due diligence, coupled with strategic diversification of credit exposure, can help ease pressures that lie ahead.
Leveraging data analytics and financial forecasting tools can provide companies with insights into customer creditworthiness and provide early indicators of potential financial distress.
As we move into 2025, cautious optimism must be balanced with strategic foresight. Firms that invest in comprehensive risk management frameworks and maintain adaptive financial strategies are best placed to withstand ongoing financial challenges.
There will be uncertainty for some time, certainly throughout the first half of the year. Concerns about the economic situation will persist, and bad debts and insolvencies will continue to remain high.
