European corporate distress eases as businesses weather Middle East shock better than feared

The latest Weil European Distress Index (WEDI), an indicator of corporate distress and an early-warning indicator of default risk, has shown that distress across Europe eased in the latest quarter, while remaining above the long-run average.

The overall index fell to +2.7 in August from +2.8 in May, reversing some of the deterioration recorded earlier in the year and leaving distress broadly unchanged from August 2025.

The data suggested European corporates have absorbed some of the initial shock from the conflict in the Middle East better than feared, supported by more resilient economic activity and relatively supportive financial markets.

The WEDI, produced by law firm Weil, tracks corporate distress and acts as an early indicator of potential default risk.

Across the European economy as a whole, distress eased marginally in the latest quarter, falling to +2.7 in August from +2.8 in May. It was broadly unchanged from August 2025.

Euro Area GDP grew 0.6% in the second quarter, its strongest quarterly performance since Q2 2022, while financial markets have remained relatively supportive.

But the travel sector is facing a more challenging operating environment.

Weil said demand across travel and accommodation has remained relatively resilient, but higher fuel, wages, energy and other operating costs are increasingly squeezing margins, while geopolitical uncertainty continues to weigh on businesses.

The deterioration places travel, leisure and hospitality behind the three most distressed sectors tracked by the index: retail and consumer goods, industrials, and infrastructure, utilities and power.

Retail remains by far the most distressed sector, with its index rising to +8.1 in August from +6.0 a year earlier.

The wider European picture also points to continued pressure on corporate balance sheets.

Inflation rose to 3.3% in August, while producer prices were 5.8% higher year-on-year in July. Profitability, investment and liquidity remain significant sources of distress for businesses.

The UK saw corporate distress ease to +4.0 in August, from +4.4 in the previous quarter, although it remained above the +3.6 recorded a year earlier.

The UK's economy grew 0.4% in the second quarter and business investment increased 1.7%, with the IMF raising its 2026 growth forecast to 1%.

However, financing costs remain a significant source of pressure, particularly for smaller businesses.

France has overtaken Germany as the most distressed market covered by the WEDI, with distress unchanged at +4.8 during the quarter but up from +3.4 a year earlier.

Germany's distress eased to +4.4 from +4.8 in the previous quarter, although corporate insolvencies reached their highest quarterly level since 2005 in the second quarter.

Spain and Italy remain the least distressed markets covered by the index, with their combined index falling slightly to -0.2.

The findings suggest that while travel demand has held up, resilience on the demand side is not necessarily translating into resilience on the balance sheet.

Andrew Wilkinson, partner and head of Weil's London restructuring practice, said businesses had absorbed the first wave of geopolitical and economic disruption better than expected.

"But resilience should not be mistaken for recovery," he said. "Distress remains above normal levels, and financing conditions are still challenging."

He warned that if borrowing costs remain elevated while demand and margins stay under pressure, the current level of distress could begin to feed through into higher default rates across Europe.

Jenny Davidson, partner in Weil's London restructuring practice, said retail was showing particularly high levels of distress, but highlighted the changing nature of the pressures facing businesses.

"Profitability and liquidity now play a much greater role as retailers contend with higher costs, rising interest rates and uneven consumer demand," she said.

For travel businesses, the latest WEDI data underlines the growing importance of managing costs and cash flow even while passenger and accommodation demand remains comparatively robust.

The sector's move into above-average distress also comes as travel companies contend with higher labour costs and energy prices, and potentially more restrictive financing conditions.

The message from the index is therefore one of resilience rather than recovery: travel demand may be holding up, but the cost of serving that demand is putting increasing pressure on the businesses behind it.