United Kingdom: Risk Assessment
Country Risk Rating
|A2||The political and economic situation is good. A basically stable and efficient business environment nonetheless leaves room for improvement. Corporate default probability is low on average.|
Business Climate Rating
|A1||The business environment is very good. Corporate financial information is available and reliable. Debt collection is efficient. Institutional quality is very good. Intercompany transactions run smoothly in environments rated A1.|
Growth based on solid foundations
After reporting better performances than many of major advanced economies in 2015, UK growth would decline slightly in 2016. It will still be sustained by private consumption, associated with wage growth (in addition, the minimum wage is set to rise by 7.5% next year) and the ongoing improvement of the labor market situation (unemployment rate below 5.5% at the end of 2015), all of this in a favorable context of low borrowing costs and lower savings rate. However, these drivers will weaken slightly, given the smaller increase in real wages due to the expected rise in inflation. The rise in property prices in 2015 (almost 8%) could continue in a context of still limited supply, which will sustain consumption but limit opportunities for first-time buyers and will not help bring down the high level of household debt (125% of GDP). The risk of a property bubble therefore needs watching. Investment on the other hand will be more vigorous, with businesses enjoying solid balance sheets, high profits and advantageous financial conditions. The funding for the lending scheme will, meanwhile, be extended until January 2018 and the amount which banks can borrow will gradually be reduced. Large infrastructure projects remain a priority for the authorities (£100 billion in spending by 2020 announced, i.e. 5% of GDP in 2015), especially with a view to achieving a recovery in productivity, which remains a key issue. External trade will continue to penalize activity, with upward pressure on sterling against the euro and higher wage costs limiting competitiveness gains, so exports will rise only slightly due to the modest euro zone recovery. This trend is unlikely to offset the liveliness of imports, buoyed by domestic demand.
Inflation struggled to stay in positive territory in 2015, in particular because of the drop in commodity prices and the appreciation of the pound sterling against the euro. In 2016, it is expected to rise, as the drop in energy prices comes to a halt, wages rise and spare capacity in the economy shrinks. In a context of a renewed increase in inflationary pressures and good economic performance, monetary policy could return to normal during 2016.
Fiscal consolidation remains a government priority
The government is still on a program of fiscal consolidation, even if the deficit is reducing more slowly than expected. This is being carried out through spending cuts (public sector wage moderation, cuts in health spending). On the revenue side, the budget includes tax cuts on investments as well as lower corporation tax (down from 20% to 18% by 2020), and the gradual abolition of the levy on banks' balance sheets, which will, however, be replaced by an 8% levy on banks' profits. The budget deficit will accordingly come down in 2016.
The current account balance will improve slightly in 2016, on the back of the modest euro zone recovery, which will permit (i) a reduction in the income deficit thanks to increased profitability on foreign investments, (ii) increased exports of financial services (London still being the world's leading financial center), and (iii) a rise of exports of goods. Coupled with lively imports, the trade balance should ultimately remain stable overall.
Risk of "Brexit" cannot be ruled out
The Conservative Party won a majority in the May 2015 Parliamentary elections, bringing to an end five years of coalition with the Liberal Democratic Party and also strengthening the fiscal consolidation policy conducted by the Chancellor, George Osborne. The Labour Party has been weakened as a result. The referendum on the UK's position in the European Union (EU) will take place by the end of 2017 (probably in 2016). An exit from the EU would have a significant economic impact on the country.
The country has risen two places in the Doing Business rankings and is in first place among the G7 countries. The business climate is improving: it takes only 4.5 to set up a business (compared with an average of 20 in other countries), with a cut in corporation tax and increased exemptions on social security payments helping improve the country's attractiveness.