United Kingdom

Softer Brexit does not rule out economic slowdown

AA1

LOW RISK for entreprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

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GDP USD2622.434bn (World ranking 5, World Bank 2017)
Population 66.02mn (World ranking 22, World Bank 2017)
Form of state Constitutional Monarchy
Head of government Theresa MAY (Conservative Party)
Next elections 2022, legislative
  • Supportive economic and fiscal policies
  • High trade balance surplus on services
  • Healthy banking sector
  • Diversified export structure
  • Very friendly business environment
  • High trade balance deficit on goods
  • High current account balance deficit
  • Uncertainty surrounding Brexit
  • Decreasing long term per capita income
  • Low productivity growth

Uncertainty costs UK GDP growth an estimated -0.3pp every year

In the immediate aftermath of the Brexit referendum vote back in 2016, the UK economy managed to maintain its solid momentum. Political uncertainty was contained: the monetary policy response was proactive and fiscal policy was supportive; business and consumer confidence remained resilient; the stock markets were boosted by a weaker pound and the services sector continued growing.

However, the prolonged high Brexit uncertainty, notably since July 2018, has significantly reduced the pockets of resilience in the UK economy. The sterling depreciation (more than 12% since 2016) has increased import costs and triggered a fall in companies’ margins, which have reached their lowest level since mid-2014. Investment stands almost 2% below the pre-referendum level and contracted by -0.9% in 2018 for the first time since the Great Recession. Consumer spending growth (+1.7% in 2018) reached its lowest level in five years. In late 2018, consumer confidence reached similar low levels as in the aftermath of the Brexit referendum, while the savings rate fell to a record low. The weakness of domestic and also external demand has driven a strong deceleration in turnover growth in the manufacturing sector (below 2% y/y) while services remained more resilient (around 8% y/y).

Hence, excluding the contingency stockpiling, the UK economy has been in technical recession since Q3 2018 and should remain so in H1 2019 until the risk of a no-deal Brexit is fully off the table. We continue to give 25% probability for a no-deal Brexit in 2019. The uncertainty is estimated to cost UK GDP growth -0.3pp every year and should continue to weigh in 2020 as negotiations on the future Free Trade Agreement are likely to be tough. We expect GDP growth to slow to +1.0% in 2020 after a meagre +1.2% in 2019.

We expect another two consecutive years of rising business insolvencies

Business insolvencies have been on the rise since mid-2018 and increased by +10% over the whole year (to 21 237 cases). While rapidly increasing, business insolvencies remain 40% below the 2009 highs. Top insolvencies (companies with more than EUR50mn turnover) accelerated in Q4 2018 with five cases from two in Q3. In total, there were 19 cases in 2018 vs. 15 in 2017. The most impacted sectors are retail, agri-food and construction. We expect corporate insolvencies to increase by a further +9% in 2019 even in the event of an agreement on the separation terms and a framework for the future UK/EU relationship. This level would worsen to +20% in the event of a no deal Brexit, which would also see the UK economy move into recession (GDP would fall by -1%).

Trade structure by destination/origin

(% of total)

Exports Rank Imports
United States 14%
1
16% Germany
Germany 10%
2
8% China
France 6%
3
8% United States
Netherlands 6%
4
8% Netherlands
Ireland 5%
5
7% Belgium

Trade structure by product

(% of total)

Exports Rank Imports
Cars 12%
1
9% Non-Monetary Gold
Pharmaceutical 7%
2
9% Cars
Aeronautics 7%
3
5% Pharmaceutical
Engines 4%
4
3% Aeronautics
Non-Monetary Gold 4%
5
3% Telecommunications Equipment

An increase in the average DSO to 53 days is perceived as a result of high value unpaid invoices.

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings

UK courts are efficient in delivering timely decisions, but recent changes in charges mean it can be expensive for large value debts. Timely escalation from credit control to skilled external debt collection agencies remains effective.

The insolvency framework is oriented towards the protection of creditors’ rights, although an emphasis has been made on the need to rescue viable businesses. Such proceedings would not guarantee that the debt would be recovered as in practice there are no limitations as to how much of the debt may be written off during renegotiations. Furthermore, liquidation proceedings would rarely yield any proceeds to unsecured creditors.

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Collection complexity United Kingdom

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