Shock resistance

Business world lives (unconsciously) from shock to shock

Hind Salhane & Eric Van den Broele

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6 Mins
26/05/2025

In a first article, you could read about the reasoning behind redundancy or the shock resistance of companies. After all, we regularly encounter shocks, some more impactful than others. In this second part, we take a closer look at these.

Difference between business cycle lows and discontinuities

There is a big difference between a downturn and a shock situation. We sometimes refer to the latter as an economy or sharing economy 'in discontinuity'. Over the past 70 years - and presumably before that - the number of firms in severe difficulty has always been between 4% and 7%. At no time have there been:

  • More than 6-7% have been companies that could clearly be referred to as companies in dire straits. Not even in the deepest downturn.
  • Fewer than 4-5% have been companies that could be clearly identified as being in serious difficulty. Not even in the highest boom times.

Companies in dire straits

So, the difference between boom and bust and the relationship to companies in dire straits is not that huge. This is more of a variation than a shock.

Hoogconjunctuur - Laagconjunctuur

1 = Boom: at least 4-5% of companies in serious difficulties

2 = Downturn: maximum 6-7% of companies in severe difficulty

  1. Within the range of cyclical movements, classical analysis is perfectly appropriate.

Different type of bankruptcies

In addition, it is an established fact that a wave of bankruptcies follows a period of downturns. Thus, bankruptcies by no means predict which direction the business cycle will take. On the contrary, bankruptcies chase the business cycle. Under normal circumstances, the number of bankruptcies rises about six months after the downturn has clearly broken through. A typical feature of this wave of bankruptcies is that it mainly strikes within the population of firms that - usually for a long time and structurally - are in serious difficulty.

A downturn is thus characterised, among other things, by the fact that more firms fail that were already struggling before the downturn. They exhibit typical symptoms that make the predictability of an impending debacle particularly high.

Therein lies the major difference with a shock. A situation of economy in discontinuity affects all firms, or at least all firms within a sector or geographical space subject to a shock. With the emphasis on 'all'. Firms in trouble (severe or otherwise) before the crisis are (logically) pushed further into trouble and fail. Just like in a downturn. But in addition, even companies, which are perfectly healthy according to classical financial analysis, are vulnerable to a sudden shock if they are not redundant.

Lack of reserves in period of discontinuity

So, in a period of discontinuity, a company should be able to fall back on its reserves. But if they are not there, then the company has a big problem and should seek external help. This can be done in two ways:

  • Either the government intervenes to provide massive premiums and subsidies (like during the coronavirus pandemic). However, that means a social tax, which our children and grandchildren will be paying for, for decades to come.
  • Alternatively, the company can take out a loan, at least if it qualifies. In any case, it entails additional costs at the time of a crisis.

Let it be a message to businesses to build that reserve pot anyway.

From shock to shock

In our world, we encounter all kinds of shocks. Not all with a global impact (as during COVID-19), but we actually live continuously from shock to shock that is not - or at least difficult - to predict.

In recent years, we have had shocks related to inflation and a rise in wage costs and energy prices. The Russian invasion of Ukraine is also among them. But not so long ago, a ship also caused a shock after it got stuck in the Suez Canal and disrupted supplies. There are companies that did not receive sufficient supplies of raw materials and were forced to shut down production. Recently, US President Donald Trump sowed chaos and uncertainty with his import tariffs. And, closer to home, what about ordinary street works making local shops difficult or inaccessible for a while?

So, in practice, the risk of unpredictable shocks remains every day, with an impact locally or internationally. And we should also note that a certain part of our business community is not resistant to it. In that context, reserves are already no luxury.

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