United Kingdom: Risk Assessment

Country Rating1

Rating: A3

Business Climate Rating1

Rating: A1

Risk Assessment2

Growth turned positive in the 3rd quarter 2012

After three consecutive quarters of negative growth, activity turned positive in the 3rd quarter 2012 (+1% q/q), thanks to the Olympic Games. Despite this, confidence levels for households and business leaders remained weak in September, suggesting mediocre growth for the full year. Growth has been downgraded from an increase of 0.2% to a decline of 0.5%.

Several factors continue to fuel the sluggish environment. The unemployment rate remains high at 8.1% in July and could rise by the end of the year as temporary employment created by the Olympic Games disappears and the New Enterprise Allowance promoting self-employment expires. Additional factors are deleveraging (debt represents 149% of disposable household income versus 170% in 2008), still weakened credit conditions, the desire to keep the savings level at around 7% of disposable income and uncertainties linked to the eurozone crisis. However, inflationary pressure has dissipated, and after a peak of 5.2% in September 2011 the average for 2012 should be around 2.7%. This should help to ease contraction in household expenditure (64% of GDP) this year. All the more so as the Bank of England (BoE) is continuing with its expansionary monetary policy (key rate held at a low level and a likely increase in November in the £375 billion of quantitative easing). The construction sector continued to contract in the second quarter (end of infrastructure contracts linked to preparations for the Olympic Games). This continued during the summer and the sector is likely to remain depressed throughout the year.

This recession has reduced tax receipts in relation to corporation tax. However this should not lead to a revival of austerity measures as the government downgraded its forecast reduction in the public deficit in November 2011.

 

Exports likely to contract in 2012

The latest survey in the manufacturing sector highlights a rise in production costs and acceleration in the decline in export orders. Strong rises in inventory levels should be followed by a decline in manufacturing production. Activity in the services sector has only improved slightly. Companies are therefore experiencing margin pressure which will also lead them to curb investment. Exports are suffering from the slowdown in demand from the European Union, in particular from the eurozone, the main trading partner (54% of the total). Imports should slow in the second half of the year, in line with household and corporate caution, but will remain livelier than exports for the full year. External trade will therefore make a negative contribution to growth in 2012.

 

Bank lending depressed and bankruptcies rising

The British banking sector is weakened on the one hand by its considerable exposure ($1200 billion) to euro zone public and private counterparties and, on the other, by a slower progression in its profits. The banks’ efforts to reduce their debt led to substantial restrictions on the supply of credit, particularly to SMEs. Faced with this negative trend, the BoE and HM Treasury have implemented a Funding for Lending Programme (£20 billion), which anticipates granting long-term loans to banks at preferential rates subject to these banks’ commitment to provide lowcost financing to the real economy, in particular to SMEs. It is too early to assess the impact of this measure on credit to companies and households, but the allocated amount already appears limited versus requirements. Large companies are less affected as they have a high self-financing rate (160%) and access to the bond markets. Company bankruptcies increased by nearly 5% over the twelve months to June 2012. This is reflected by the increase in the Coface payment incident index.

Strengths

  •  Bank of England’s flexible monetary policy
  •  Hydrocarbon production meeting three quarters of energy needs
  •  Government determination to adjust public finances

Weaknesses

  •  Economy heavily dependent on financial services
  •  Instability of the coalition government over the
  • European question
  •  High level of public debt and deficit
  •  Record level of private debt
  •  Weakness of the banking system
  •  Growing proportion of the young in the unemployment figures a source of social tension

1Country and Business Climate Ratings courtesy of Coface (12/2013)
2Risk Assessment and methodology courtesy of Coface (12/2013).

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