Decline in insolvencies continues

In 2017 the number of reported insolvencies declined again noticeably compared with the previous year. This applies as much to company bankruptcies as to private insolvencies. Consumer insolvencies declined by 6.9 percent while company bankruptcies dropped by 6.6 percent compared with 2016. All in all, the correlation between economic development and insolvencies should remain intact: in other words, if the German economy grows, the number of insolvencies will decline. And by extension, if the German economy contracts, the number of reported insolvencies will increase.

The fact that the number of reported insolvencies has continually fallen in recent years can also be attributed to the ongoing phase of low interest rates. Low interest rates enable companies and private households to raise longer-term loans without the interest burden becoming too great. However, this development could prove risky in the event of an interest rate increase: if companies or private households require follow-up finance once the existing loan agreements have expired, the interest burden could increase noticeably compared with the previous loan agreement and therefore make it difficult to service the loan.

Despite the current decline in reported company insolvencies, the expected number of debt defaults has now risen for the second time in a row. This is due to the average size of the insolvent companies. The larger the companies concerned, the higher the corresponding debt defaults tend to be, and the higher the loss of jobs. Thus, contrary to the encouraging development of reported insolvencies the actual economic significance of company insolvencies has actually worsened somewhat.

As the underlying economic conditions for companies and private households will remain positive this year, the number of reported insolvencies can be expected to decline further in 2018. However, this decline will most likely be less dynamic than in the previous year. Nevertheless, the development of company insolvencies as well as other insolvencies remains encouraging for the time being.

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