United Kingdom: Risk Assessment
Business Climate Rating1
Limited slowdown in growth
UK growth has been at a higher level than in other advanced economies in 2014. A change of course in monetary policy is expected in 2015 and the resulting rise in interest rates should lead to slower growth. With inflation on a downwards trend, this should delay the timing by the Bank of England (BoE) of its tightening of monetary policy. In external terms, the reduction in the cost of raw materials as well as the reduction of inflation in the Eurozone limited price rises in the United Kingdom in 2014. In addition, in domestic terms, wages are still not rising and are therefore not placing pressure on prices. This delay effect will enable the rate of growth to stay at a level well above 2% (average for the period 1998-2012).
Household consumption, despite a slight slowing, will continue in the right direction in 2015, thanks to the continuing fall in unemployment (below 6% at the end of 2014). Furthermore, this positive data is mainly due to the growth of full time employment. However, the increase in consumption, which represents 65% of GDP, will slow slightly because wages are not rising. The level of debt of UK households is high (125% of GDP) with the result that they are using savings to consume (6% of disposable income). In this context, consumption is dependent on household confidence, which remains high at the end of 2014. There is nevertheless a risk of a property bubble that needs monitoring. If it were to burst, this would result in a sudden contraction in the economy (in particular in consumption). Despite the desire of the BoE to hold back property prices in 2014, these rose by 12% year-on-year (end of September 2014) against 5.5% in December 2013.
Investments in fixed assets should continue to boost growth in 2015. The production capacity utilization rate is high (82%). With highly favorable loan conditions, this should encourage companies to modernize. They are also reporting solid profits and Coface has recorded a historically low level of non-payment in the United Kingdom. In 2015, corporation tax will be reduced from 21% to 20%.
Outstanding bank loans to the SME sector, however, declined in 2014. Despite the Lending for Lending Scheme, banks remain timid in their lending policies. The country’s banks have had to clean their balance sheets and small companies have thus been forced to seek alternative sources of finance. The British banking system is in effect oversized in absolute terms (£11,000bn and 900% of GDP).
Confidence in the construction sector seems to have declined slightly following the government restrictions which were intended to rein in the rise in property prices. The sector will, however, continue to head in the right direction in 2015.
The public deficit should decline in 2015 to around 5% of GDP. It will, however, remain high in a context of strong growth. Public debt will therefore continue to grow.
Exports suffer as currency strengthens
Whilst the upturn in growth in the Eurozone (47% of exports) has helped to boost UK exports, the strength of sterling has pushed up the prices of its exports. Exports are therefore expected to struggle in 2015. The result is that European products are becoming more attractive and imports should therefore grow at a faster rate. Whilst there are a number of competitive advanced industrial sectors (pharmaceutics, automobile, aeronautics), the United Kingdom’s current account balance remains largely dependent on exports of financial services and corporate services. The balance of trade in goods is in effect in deficit at around 7 GDP points, and that in services in surplus by 5 points. London remains the world’s leading financial market. Faster growth in the developed economies will benefit exports of corporate services. In this context, the current account deficit will grow slightly in 2015.
Election results closely watched in Europe
Parliamentary elections will be held in May 2015. The Labour party is ahead in current polls but the lead over the Conservative party has been narrowing since 2013. A coalition with a center-right party (Liberal Democrats) will probably be necessary for any parliamentary majority. The far-right UK Independence Party (UKIP), which wants to leave the EU, could win a number of parliamentary seats and thus exert pressure on the policies of the future government. If the Conservative party of the Prime Minister, David Cameron, wins the elections, a referendum on the United Kingdom’s continued membership of the European Union will be held in 2017. On the basis of recent polls, there is a real danger of the country leaving. In economic terms, an exit would be damaging for the United Kingdom as all existing trade agreements (bilateral and multilateral) would have to be renegotiated.
- Oil and gas production covering three-quarters of energy needs
- High-tech sectors
- Low corporation tax
- Weight of financial services and property in the economy
- Disagreement within the governing coalition on subject of Europe
- High levels of debt and public deficit
- High level of private debt
- Fragile banking system