When will Europe's economic downturn end?

Due to soaring inflation and rising borrowing costs, European companies are facing an increasingly challenging business environment. Interest rates continue to remain at unsettling high levels, posing significant challenges for businesses. With the rapid increase in debt costs, many companies have had to stop or delay projects, which also affects capital investment and recruitment. The intensification of inflation has led to an increase in the prices of various essential goods and services, while the soaring interest rates have also increased the cost of mortgage loans, resulting in a decrease in consumer disposable income.

Firstly, corporate distress can be described as an increase in uncertainty in the fundamental value of financial assets, an intensification of volatility, and an increase in perceived risk. This also includes the disruption of the normal operation of the company's financial performance, including the requirement for the ability to fulfill debts. Especially, the vulnerability of highly leveraged and capital intensive industries in Europe seems to be increasing. In addition, smaller companies are more susceptible to sustained interest rate hikes and lower credit ratings, leading to more difficulties. Industries such as industry, healthcare, retail, and real estate are also facing severe challenges.

It can be seen that the gap between European companies is widening, and small businesses are being severely impacted by rising interest rates and liquidity challenges. Those enterprises in the dilemma of refinancing are particularly impressed. Although large enterprises face the same market conditions, they typically benefit from more diverse financing options and larger liquidity reserves, providing them with greater flexibility in managing their capital structure. Neil Dewani, the restructuring business partner and co head of Will London, said in a press release, "The situation of European companies in distress is constantly changing. Although geographic location and industry remain important factors in evaluating a company's financial prospects, the impact of company size on its degree of distress is much greater."

Secondly, although some industries show signs of recovery, the level of difficulties is still relatively high. Due to the current macroeconomic indicators being more subtle than previous predictions, it is expected that capital intensive and highly leveraged enterprises will continue to feel pressure. The real estate industry is the most severely troubled industry on the entire European continent, mainly due to the decline in real estate value and refinancing difficulties. In addition, heavily indebted real estate and real estate companies are working hard to repay their debts, leaving little available funds for new investments or ongoing projects.

At present, Germany remains the most troubled country in Europe, and its economy is seen as the sick man of Europe, with its industrial sector particularly severely affected. Similarly, due to the cost of living crisis and the increase in rent and mortgage loans, household income has decreased, and consumers and the retail industry have also been severely affected. Young people also bear more debt than ever before, which reduces their disposable income for purchasing high-end or luxury goods. In the past few months, several commercial street companies in the UK and Europe have also faced a series of technical problems and bankruptcies. However, liquidity in the healthcare industry seems to have slightly increased compared to before, and investors are becoming cautious and optimistic, despite concerns about over leveraged companies.

Due to the cost of living crisis and the continuous impact of the COVID-19 epidemic and the Russia Ukraine war, consumers and enterprises are avoiding new investment. In addition, in the context of sustained sluggish overall economic growth, liquidity has also been affected, which has had a spillover effect on profitability. Similarly, due to tight liquidity and declining investment, French companies have been struggling for almost a year. Risk appetite has also been greatly affected, and economic growth has also stagnated. Consumer confidence seems to have rebounded in the past few months, but since February, it has also sharply declined, mainly due to weak retail sales.

Overall, although the European economy has barely avoided a "technological recession", the economic prospects of European countries are difficult to be optimistic due to factors such as intensified geopolitical tensions, sustained monetary tightening, and weak global demand.