UK businesses are more vulnerable to the new energy crisis as stress levels rise

UK businesses are reeling from the latest global energy shock in a financial environment far weaker than during the 2022 Ukraine crisis, raising concerns that the current conflict in the Middle East could trigger a swifter and more severe wave of business depression.

New data from the Weil European Distress Index shows that financial pressures on European companies had already entered the “stress zone” before the escalation of tensions involving Iran, leaving firms with little ability to absorb other energy-driven shocks.

The index, compiled by law firm Weil, Gotshal & Manges, tracks the performance of more than 3,750 listed companies across Europe using indicators such as cash flow pressure, debt levels and return on investment. It recorded a reading of 2.5 before the current crisis, compared to -7 in February 2022, just before the Russian invasion of Ukraine, indicating a significant deterioration in the company’s stability.

The latest crisis has been caused by disruptions to oil and gas supplies around the world, particularly through the Strait of Hormuz, a key shipping lane that carries a fifth of the world’s energy exports. Escalating tensions, including attacks linked to Iran-backed groups, have raised concerns that other routes such as the Red Sea are also faltering.

As a result, oil prices have risen sharply, with Brent rising from around $60 at the start of the year to reach $115 a barrel. The spike is already in higher costs for businesses, from manufacturing and procurement to food production.

Andrew Wilkinson, restructuring partner at Weil, warned that the pace of change was a key risk factor.

“If energy prices remain high and confidence continues to weaken, we could see stress build faster than in previous cycles,” he said.

Among the major European economies, the UK is seen as the most vulnerable. The index ranks Britain as one of the most stressed markets in Europe, behind only Germany and France, but identifies it as the most exposed to rising borrowing costs.

The resurgence of inflation, driven largely by higher energy prices, is expected to limit the Bank of England’s ability to lower interest rates, as markets grow prices are likely to be further tightened.

The higher rates will increase the cost of servicing the debt of businesses, many of which are already operating under austerity measures after several years of economic disruption.

The UK’s economic situation adds to the concern. The latest data from the Office for National Statistics showed that growth stagnated in January, highlighting the weakness of the recovery even before the latest energy shock.

At the same time, unemployment rose to 5.2 percent, the highest level since early 2021, continuing to weigh on the economy and consumer demand.

The combination of weak growth, rising costs and tight financial conditions creates a challenging environment for businesses, especially those with large energy exposures or large liabilities.

The vision is also clouded by the features of the world. The OECD has already warned that the UK could suffer the worst of the G20’s economic growth as a result of the conflict, underscoring the scale of the challenge.

Rising energy costs are also expected to squeeze household incomes, reduce consumer spending and add another layer of pressure to businesses.

Unlike 2022, when many companies are going into a power crisis with tight balance sheets and access to cheap capital, today’s environment is characterized by high debt levels and tight credit conditions.

This leaves firms with few options to absorb shocks, increasing the risk of insolvency and the task of restructuring if conditions worsen.

Recent data suggest that the current energy crisis may occur more quickly than previous episodes, with financial stress building at a faster pace across the corporate sector.

In the UK, the combination of high energy dependency, rising interest rates and weak growth creates a particularly challenging combination.

As the conflict in the Middle East continues to unfold, businesses face a period of uncertainty, where resilience will be tested and the margin for error greatly reduced.