October 10, 2024
The latest Weil European Distress Index reveals a mixed picture of economic recovery across Europe. Analysing data from over 3,750 listed corporations and financial market indicators, the Index shows a general decline in distress levels, highlighting positive developments in many of the continent’s major economies.
Sector trends
Distress among European Industrials spiked over the last quarter, rising from fourth to the second most distressed sector. Investment pressures are especially acute for industrial companies, playing a major role in the rise in distress. An environment of climbing capital costs and a reduction in new project commitments echoes the broader slowdown in global demand. Mounting pressure on manufacturers to meet net zero targets, along with a recent succession of high-profile insolvencies and job cuts over recent weeks, particularly in Germany and the UK, suggest the outlook may further deteriorate. Geopolitical dynamics are also exacerbating the situation, with persistently high energy prices, especially impacting German industry, and a reduction in Chinese demand for manufactured goods. These factors are not only cyclical but increasingly structural, posing longer-term challenges to the sector’s recovery.
Distress has eased slightly for the Real Estate sector compared to the previous quarter and year, although it remains the most distressed sector due to ongoing challenges. While improvements in investment and profitability have contributed to this positive trend, heavily leveraged companies still face challenges in refinancing amid a high-rate environment.
The Healthcare sector, now the third most distressed, faces ongoing challenges with cash flow and investment sentiment weighing down on overall performance.
Retail distress has risen both quarterly and yearly, as declining household finances have reduced consumer spending and company profits. Liquidity pressures, worsened by rising borrowing costs, add to the sector's uncertain outlook.
Country trends
A weakened industrial sector has left leading manufacturing powerhouse, Germany, particularly exposed. It remains the most distressed market measured, with levels now the highest since the start of the Coronavirus pandemic. The uncertainty surrounding the outcome of the upcoming U.S. election, and the potential policy changes that could follow, pose further risks to Germany's economy. Proposed tariffs on international goods could hit the manufacturing sector hard, with the Ifo Institute forecasting a 32% decline in car production, deepening the struggles of an already fragile industrial base.
Elsewhere, corporate distress among UK businesses also rose in the previous quarter to its highest level in 2024, driven by weaker investment metrics, poor profitability, and limited liquidity. Growth has slowed from 0.7% in the first quarter to 0.5% in the second quarter but showed no month-on-month growth in either June or July, suggesting further weakness. While there is some hope surrounding potential BoE rate cuts, uncertainty around the upcoming Autumn Budget is creating hesitation, with conflicting signals delaying investment decisions, particularly among foreign investors.
In contrast, Spain and Italy have shown resilience, with stronger investment, valuations, and liquidity. Spain's unexpected GDP growth and robust manufacturing have bolstered confidence, while Italy’s GDP, though more subdued, is still expected to grow faster than Germany or the UK.
