KPMG Financial Performance Index (FPI)

We are pleased to share with you the 2Q24 edition of our quarterly KPMG Financial Performance Index (FPI) publication. We provide our insights into the changing state of corporate health across all UK markets and sectors, following the end of the reporting season for the three months to June 2024.

The KPMG FPI is a metric used to measure a company’s financial health by its ‘probability to default’. The analysis has been prepared using the probability to default formula which takes into account financial information and market data, as designed by John Y. Campbell, Jens Hilscher, and Jan Szilagyi. The FPI score ranges from 0 - 100. The lower the score, the more likely a company is to default. In contrast, the higher the score, the less likely it is to default. In this analysis, released every three months, we analyse the KPMG FPI score movements of publicly listed companies in the UK to draw insights into corporate health across the UK economy. 

KPMG FPI combines both market and financial information to determine a company’s relative financial distress levels. KPMG believes that combining the two types of information detects deteriorating corporate health more effectively than either source alone.

Between March 2024 and June 2024, we observed a slight increase in the UK’s KPMG FPI score from 88.7 to 89.0, indicating an overall increase in the financial health of companies headquartered in the UK. Out of the 24 sectors analysed, significant improvement was observed across Pharmaceuticals (+5.26 percentage points) and Raw Materials & Natural Resources (+2.84 percentage points).  The most significant decrease in financial health was observed in Healthcare (-3.15 percentage points) and Manufacturing (-2.86 percentage points). 

Several sectors now demonstrate strong financial health (an FPI score over 95.0) including Agriculture & Husbandry, Biotechnology, Trading Companies & Distributors, and Aerospace & Defence.

• The KPMG UK Economy Forecast (July 2024) confirms that GDP growth in the UK is outperforming previous estimates, rebounding by 0.6% during the first quarter of the year, with expectations of continued acceleration.
• Household consumption has been supported by cuts to National Insurance Contributions, which are expected to boost real household disposable income by 1%. Consumer confidence is gradually recovering, consistent with continued tightness in the labour market and the fall in inflation. Mortgage rates are normalising, and the drag from higher borrowing costs should soon begin to ease. Household utility bills fell by 12% in April and are set to fall by a further 7% in Jul.
• Business investment is expected to increase because of additional political stability post general election, although the expected fiscal event in the autumn will set out the new government’s economic agenda. 
• Despite these positive signs, the IMF’s estimate for overall UK GDP growth during 2024 (+0.7%), is the second weakest projected growth in the G7, attributed to factors such as relatively high cost of living, elevated borrowing costs and poor productivity stemming from low labour participation.
• The economic growth in 2024 appears to be tepid, with the UK and other European nations grappling with low domestic demand, disruptions in supply chains leading to increased trade barriers, ongoing geopolitical tensions, and higher corporate debt servicing costs due to high-interest rates.

Further analysis of the UK’s economic outlook can be found here.

Seven sectors registered FPI scores lower than 90 index points, with the Healthcare (86.5), Manufacturing (88.1) and Energy (86.0) sectors demonstrating the most significant declines during the quarter.  Notably, the Chemicals sector scored only 77.1 in 2Q24, further witnessing a 0.1 percentage points decline from 1Q24.

Sectors with notable FPI scores include:

• Healthcare, which was impacted by significant decline in the Medical & Therapeutic Devices subsector (-8.48 percentage points to 73.93) resulting in an overall sector decline from 89.7 in 1Q24 to 86.5 in 2Q24.
• Energy declined from 87.2 in 1Q24 to 86.0 in 2Q24, largely led by a decline in the Coal Products (-18.3 percentage points) and Oil & Gas (-2.8 percentage points) subsectors.
• Manufacturing, which witnessed an overall sector decline of 2.86 percentage points to 88.1 in 2Q24, largely due to an Automotive subsector decline of 12.6 percentage points to 72.6. The ongoing global supply chain disruptions have led to delays and increased costs for raw materials and components, further heightened by high energy prices, resulting in increasing pressure on manufacturers' profitability.
• Chemicals, with the lowest FPI score among the 24 sectors at 77.1. This can be attributed to reduced chemical production in the UK (as several countries in the EU).  European industrial production continues to struggle in the initial months of 2024, leading to reduced demand for chemicals as manufacturers scale back production or hold off on new projects.

Ten sectors (out of 24) posted q-o-q growth in FPI scores in 2Q24; Pharmaceuticals, Raw Materials and Natural Resources, Financial services and Business Services being the top growing sectors.

Further sector and sub-sector analysis can be supported by KPMG UK’s Turnaround Team, or by visiting the KPMG Global KPI page.