UK businesses are facing the second-highest level of “deepening” financial distress in Europe due to inflation and high interest rates.

The Weil European Distress Index has shown failing profitability as the main driver for business distress across the continent.

UK companies are experiencing the second-highest levels of financial distress in Europe, with German firms leading the way.

European businesses are struggling to balance increasing expenses with the need for continuous production, the research found.

Many companies have indicated they will have to reduce prices in a bid to maintain sales volumes.

The European real estate sector is facing challenges such as high interest rates, falling valuations, elevated energy and construction costs, and increasingly expensive financing – cementing it as the “most distressed sector” in the index.

Meanwhile, the healthcare sector is the second-most distressed sector due to interest rate burden, poor investment performance, and rising operational expenses.

Ranked third, the retail sector faces a “double squeeze” of higher re-mortgage rates and escalating rents. In addition, the cost-of-living crisis has limited consumer spending.

The study also found increased conflict in the Red Sea has harmed global trade, which is due to the Houthi attacks on commercial shipping, which have disrupted trade routes and caused significant challenges for European retailers.

As a result, there is growing concern about profitability in the retail industry.

Andrew Wilkinson, senior European restructuring partner and co-head of Weil’s London restructuring practice, said: “As the real estate sector takes the lead in distress within Europe, it’s clear that investment hesitancy and rising costs are symptoms of a larger economic malaise.

“High leverage poses a significant vulnerability in an unforgiving market, where companies confront rising costs against a backdrop of falling valuations.

“Despite falling inflation, retail and consumer goods companies are still under immense pressure.

“A challenging Christmas trading period, lack of consumer spending, and issues around pricing reductions have left retailers feeling less than optimistic about the year ahead.

“With escalating tensions in the Red Sea impacting trade routes, businesses will be monitoring what this will mean for distress levels, particularly with regards to issues around profitability.”