Development of Insolvencies in Germany in 2024

In 2023 a significantly increased number of companies became insolvent in comparison with the previous year. What can we expect for the year 2024?

After a comparatively stable period in the early 2000s, the number of insolvencies in Germany has increased again in recent years. Occasionally, a total of 25,000 in one year has been exceeded. With around 18,100 cases we were well below this in 2023. Now the situation will become more critical in various sectors. Depending on the industry, the reasons for this will be the economic situation nationally and internationally as well as the various wars and the associated sanctions causing volatile economic developments.

Bankruptcies of start-ups increased significantly last year, totalling more than 200. In these uncertain times, providers of capital consider very carefully whether they are really prepared to invest in such risks. In addition, market opportunities are being re-evaluated.

When you look more closely from the German perspective, you find many aspects of the situation that are home-made. The recent insolvency of Galeria Kaufhof has been heavily discussed in the media against the backdrop of the impending loss of around 15,000 jobs and retail capacity in our city centres. If this bankruptcy is understood purely as a knock-on from the insolvency of the Signa empire and its business practices, this is certainly not the whole story. Two previous attempts to save the company failed. The use of government funds has never been a good way to rescue and restructure companies.

Even though the rents paid for some of the locations are too high, one should also ask the critical question as to whether the classical department store business model can still be competitive in times of e-commerce. The broad product range in various segments, expensive inner-city locations and comparatively high levels of staff can make these shops unattractively expensive for customers, meaning that the costs associated with this model cannot easily be passed on to consumers.

Uncertain times economically also lead to an unwillingness to invest. This is also being felt internationally, for example in the mechanical engineering sector.

A further area that is more and more in focus is the construction industry. Credit interest rates have already fallen again slightly, but in comparison to the zero-interest situation that strongly affected price levels, interest rates have risen dramatically. This is being exacerbated by ever-higher requirements on sustainable and energy-efficient construction as well as long and bureaucratic approval procedures. Increases in the cost of materials caused by rising energy prices have driven the cost of construction so high that even with drastic rent increases the building of new housing is no longer profitable for investors. The result will be excess capacity in the construction industry. The effects of this will be particularly noticeable for construction companies and in future also for firms in the building trades.

As often pointed out by politicians, we currently have an extremely high level of employment in Germany and at the same time a high demand for employees in many areas. Regulations on migration and high social security payments ("Bürgergeld") have prevented further work-potential from being mobilized. Short-time working payments made sure that we got through the corona pandemic with a high level of employment, which is initially positive for employees. The long duration of these subsidies, however, has certainly contributed to the necessary adaptations in companies not being initiated soon enough. At least for international competitiveness, this is negative – longer-term consequences cannot be ruled out.

Although subsidies can be beneficial in accelerating desirable developments, one has to be careful that they do not become a permanent, recurring measure. Such payments tend to hinder or reduce the search for more efficiency – the achievement of higher productivity and the reduction of costs. Obviously, electric vehicles are less complex than those using conventional fuels. With the exception of the battery technology, this must be reflected in the production costs. There have recently been massive subsidies for the purchase of electric vehicles. Some car manufacturers have now clearly incorporated this subsidy into their own pricing in order to maintain sales. In the medium and long term, this will only work if a not inconsiderable contribution margin buffer has been built up for each vehicle sold as a result of this state subsidization.

We should also consider the energy-intensive steel, paper and chemical industries. In an international comparison, the complex electricity prices, with a wide variety of taxes and rebates, have led to competitive disadvantages and discussions about moving out of Germany.

As a final example the hotel and restaurant sector should be mentioned. Here, increasing costs for energy, wages and food have caused prices to rocket. Closures are inevitable, but will often take place quietly and will not appear in the insolvency statistics.

At the same time, we should consider industries with potential. We should stop any further increases in regulation and be cautious with subsidies. In addition, we should have the courage to simplify the tax system. If we take these steps, we can look optimistically towards the future, especially in relation to well-positioned, strong companies.

Furthermore, we should look at the current situation relative to the past. We are still a long way from the high level of insolvencies that occurred at the turn of the millennium.