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Nearly half and million UK firms in 'significant financial distress'

Skyscrapers under construction in London.

Oli Scarff | Getty Images

New research from British insolvency firm Begbies Traynor revealed that 484,000 U.K. businesses are in "significant financial distress," which is 14% of all economically active firms in the country.

The "Red Flag Alert" data also showed that the number of firms in "critical" distress, often precursor to formal insolvency, rose by 17% year-on-year in the first quarter of 2019, prompting concerns that the U.K. could suffer a broader economic slowdown.

Property was the hardest hit sector, with 48,182 companies in significant financial distress, up from 42,512 in the first quarter of 2018, and 13% year-on-year increase.

Construction, often portrayed as the British economy, saw a 10% year-on-year rise in major distressed businesses, while financial services had 12,728 businesses affected, and 5% increased from the same period last year.

Julie Palmer, a partner at Begbies Traynor, said the "Innovation News for the Economy," and the construction accounts for 17% of all U.K. businesses, employs 2.5 million people and contributes 6% of the nation's economic output.

"Worryingly this data shows that it is spreading to the UK's landmark services and needs to be stopped in its tracks by a combination of political certainty and commitment to support UK business, especially small to medium-sized businesses) which are the 'engine room' of the UK economy, she said.

Executive Chairman Ric Traynor said Brexit uncertainty hindered business growth and investment, but also a combination of faltering European economies and potential trade war between Europe and the United States could have wider impact on U.K. businesses than its domestic issues.

But he suggested that high employment figures and growing GDP (gross domestic product) showed the country's "economic foundations remain strong."

"If the government is able to ship right over the next few months, providing greater certainty to businesses and consumer confidence, then there is still time to head to calmer waters and avoid storm," he said.

Barclays Chief U.K. Economist Fabrice Montagne, however, suggested that the U.K. Picture over the first quarter of this year was not as bleak as the insolvency data suggested.

In a note published Friday, Montagne said that the evidence of Brexit-related stockpiling, previously only implied in sentiment surveys, had become more evident in hard data and boosted activity figures.

"GDP growth was robust through January and February as job creation with unemployment rate dipping to 3.9% while retail sales were exceptionally strong in March," Montagne said.

"Overall, Q1 GDP print support, with some upside risks to the 0.4% quarter on quarter."

Against a backdrop of less favorable global environment, and further adjustment in domestic demand, the Barclays economists are forecasting low levels of headline growth for a longer period of time.

Yet Montagne and his team are not forecasting and recession, rather GDP growth of 1.2% for 2019 and 1.2% for 2020.

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