After a sharp rise in bankruptcies in 2023, German companies are expected to go bankrupt at a higher rate this year as companies hit by high energy costs and the end of pandemic aid throw in the towel.
Restructuring experts warn that many “zombie” companies that were kept afloat after the corona pandemic through generous state aid and a suspension of the obligation to file for insolvency, which caused bankruptcies to fall to unusually low levels, are now collapsing.
Since the beginning of the year, several well-known German companies have filed for bankruptcy, including the department store chain Galeria Karstadt Kaufhof and the Hamburg bag manufacturer Bree, whose customers include Chancellor Olaf Scholz.
Due to economic stagnation in Germany, combined with high interest rates, rising wages, increased energy prices and a tight national budget, the number of companies in difficulty has become ever larger. Experts warn that this will likely increase bankruptcies by 10 to 30 percent this year, above pre-pandemic levels.
One such company is the 85-year-old wooden toy manufacturer Haba. Delivery failures due to “wrong decisions” by the IT systems at the Haba online children's clothing store exacerbated the already sharply rising energy and wood costs for the company, according to press spokeswoman Ilka Kunzelmann.
Ultimately it was too much for the family business based in Bad Rodach, a health resort in the middle of Germany. Haba was declared bankrupt by a court in December and expects to file for bankruptcy in March after laying off about a third of its 1,500 employees, closing its online clothing division and selling a school furniture factory.
Haba, a wooden toy maker in Bad Rodach in central Germany, was placed into bankruptcy by a court in December and expects to emerge from bankruptcy in March after cutting about a third of its 1,500 employees © Dreamstime
Steffen Müller, head of insolvency research at the Halle Institute for Economic Research, said the monthly rate of German bankruptcies he tracks, which excludes unregistered companies with few employees, rose above the pre-pandemic average for the first time since last summer. In December it reached its highest level in at least seven years.
“We will definitely see higher numbers of insolvencies in the next two to three months, as you can see from the first registration numbers,” said Müller. “The government has provided extensive aid to companies that had low productivity before the pandemic. This extended her life. But now they have to pay back the aid, and many are finding it difficult to do so.”
Figures released last week by the Federal Statistical Office showed that the number of companies filing for bankruptcy in district courts rose by more than 24 percent in the ten months to October compared to the same period in 2022.
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The German Ministry of Economic Affairs described the business environment as “challenging” but downplayed the extent of the problem: “In the longer term and compared to the period before the pandemic, corporate insolvencies are currently not at a significantly high level.”
Wolfgang Steiger, chairman of the economic council of the opposition CDU party, blamed the government's “disastrous economic policy” for the fact that the insolvency rate in Germany is rising faster than in many other countries. “High energy and labor costs, a home-made problem, coupled with the shortage of skilled workers are putting more and more companies in Germany in financial distress.”
The German economy shrank 0.4 percent in the third quarter compared to the same period last year, following sharp declines in retail sales, exports and industrial production.
According to the OECD, the country's growth is expected to increase to 0.6 percent this year. But it would still be one of the world's weakest major economies and several analysts have cut their forecasts since the government cut its spending plans to plug a 60 billion euro gap in its budget caused by a Constitutional Court ruling against off-balance sheet funds.
As part of budget cuts, Berlin this month ended the temporarily low VAT rate on restaurant meals introduced during the pandemic, prompting warnings that thousands of restaurants would go out of business. More than 15,000 restaurants, snack bars and cafes in Germany are at risk, according to data provider Crif, which estimates that bankruptcies in the industry will rise again this year, after rising 36.5 percent to 1,600 last year.
Hackescher Markt in Berlin: Berlin has now ended the temporarily low VAT rate on restaurant meals that it introduced during the Covid-19 pandemic © Carsten Koall/Getty Images
The General Association of the German Insurance Industry recently warned of a “massive increase in payment defaults” after credit insurers paid out more than 1.2 billion euros in 2023, 44 percent more than in 2022. “We see significantly more and greater damage from insolvencies and payment delays than in the year.” “Compared to the previous year,” said Thomas Langen from GDV, who predicted a 10 percent increase in German insolvencies this year.
Jonas Eckhardt, a specialist at restructuring consultancy Falkensteg, said the weak economy makes it more difficult for companies to pass on higher energy, labor and raw material costs through higher prices. “The big question is: How much of this can I leave to my customers?”
He predicts that insolvencies of companies with annual sales of more than 10 million euros will increase by more than 30 percent in 2024.
The European Central Bank's sharp increase in interest rates to combat inflation has also made it more difficult for companies to get out of bankruptcy by finding new investors, Eckhardt added. According to Falkensteg, at the end of last year only 52 percent of companies could be saved through bankruptcy, compared to 62 percent two years ago.
“Investors have become more risk-averse and are holding back,” he said. “Those who still want it [take over an insolvent company] have to expect higher financing costs. So it’s a high-risk transaction.”
This drying up of investment and funding has hit younger, more vulnerable companies. According to data provider Startupdetector, almost 300 German start-ups filed for bankruptcy last year, an increase of 65 percent compared to 2022. Among them were solar car maker Sono Motors, online retailer Social Chain and anti-fraud software maker Fraugster.
Many of the larger companies that failed last year were fashion retailers, transportation companies, real estate companies and auto suppliers. Collapses also occurred frequently in German nursing homes and clinics because they had difficulty passing on higher wage and energy costs to the health insurance system.
The number of bankruptcies has risen across much of the world, according to German insurer Allianz, which predicted a 6 percent increase in global insolvencies last year and a 10 percent increase this year.
“Germany lagged behind other countries such as France, the Nordic countries and the Netherlands,” said Maxime Lemerle, senior advisor for insolvency research at Allianz. “But it’s definitely catching up with the upward trend.”
While not yet close to the major corporate crisis that followed the 2008 financial crisis, Lemerle said the recent surge in bankruptcies in Germany and elsewhere is now “more than normalization, but not yet a tsunami.”
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