Outlook for recruitment companies still uncertain, warns Begbies Traynor
An increasing number of recruitment companies are experiencing financial difficulty according to Begbies Traynors latest Red Flag update.
While last weeks economic data indicates that the UK economy appears to have turned the corner, 1,725 recruitment companies experienced significant or critical financial distress in the first quarter of 2010 (Q4 2009: 1,459), a rise of 18%.
The figures are particularly concerning given the International Monetary Funds prediction that the UK unemployment rate would hit 8.3pc this year. Official statistics last week revealed that the jobless rate is currently running at 8%.
Around the country, the recruitment sector was hardest hit in the North West with 270 recruitment companies reporting significant or critical problems, a rise of 50% compared to Q4 2009, whilst the South West and the South East saw a 16.5% and 12.5% increase respectively.
Nick Hood, Partner at Begbies Traynor, said: While the economy appears to be showing positive signs of recovery, these figures demonstrate that those green shoots are fragile and that we cannot take a continued recovery for granted.
Conditions for recruitment companies are likely to remain badly stressed for the immediate future and, as we enter the recovery phase, we are likely to find that recruiters are experiencing increased pressure on their cash reserves given the need to pay contractors up front whilst having to wait to be reimbursed by their company clients.
Despite real signs that companies are hiring once again in sectors such as Financial Services, for some firms this growth can actually serve to be a real double edged sword as the scale of their payments to contractors increases.
The growing problems in the recruitment sector reflected the economy at large, where Red Flag showed that the number of companies experiencing significant or critical financial problems has risen by 20,074 or 14% to 161,601 in the first quarter of 2010 (Q4 2009: 141,527).
More worryingly, those companies together owe over 55bn to creditors, suppliers and service providers.Hood added: The magnitude of the liabilities at risk of default represents a serious risk to creditors and suppliers, indicating the potential far-reaching impact of these levels of distress. It is this ripple effect which represents a real threat to a smooth economic recovery.