Country Risk Rating

A3
Changes in generally good but somewhat volatile political and economic environment can affect corporate payment behavior. A basically secure business environment can nonetheless give rise to occasional difficulties for companies. Corporate default probability is quite acceptable on average. - Source: Coface

Business Climate Rating

A2
The business environment is good. When available, corporate financial information is reliable. Debt collection is reasonably efficient. Institutions generally perform efficiently. Intercompany transactions usually run smoothly in the relatively stable environment rated A2.

Strengths

  • Hydrocarbon production covering three-quarters of energy needs
  • Cutting-edge sectors (aerospace, pharmaceuticals, automotive)
  • Financial services
  • Competitive and attractive tax regime

Weaknesses

  • Uncertainties about the future trade relationship with the EU
  • High government and household debt (120% of disposable income)
  • Low productivity and lack of training that is not conducive to innovation
  • Regional disparities between London and the southeast, and the rest of the country, particularly in terms of transport and energy infrastructure

Current Trends

EU withdrawal would not remove all uncertainty

At the beginning of January 2020, the British Parliament was preparing to vote on the agreement presented by the government and thus to take the United Kingdom out of the European Union (EU) at the end of the month. While such a scenario would avoid a no-deal Brexit, uncertainty would persist in 2020, in relation to negotiations on the future trade agreement with the EU, and would continue to hamper growth. If the country exits with a deal, the economic environment would remain unchanged during the transition period, which is scheduled to end on December 31, 2020, as the United Kingdom would retain access to the European single market and the customs union. However, companies would likely continue to reduce their investment in equipment and construction pending clarification of trade relations with the EU, which will be crucial for most sectors. In addition, the government has suspended the corporate tax rate cut from 19% to 17% planned for 2020, to finance additional expenditure on the national health system (GBP 6.2 billion, or 0.3% of GDP). Fiscal policy will remain accommodative to support activity. However, household consumption will remain the main driver of growth in an environment that continues to be favorable, with rock-bottom unemployment (3.8% in September 2019) – leading to a consequent rise in real wages – and low-interest rates due to the Bank of England’s prudent monetary policy (key interest rate held at 0.75% throughout 2019). Foreign trade is expected to be much less volatile than in 2019, a year marked by major shocks, particularly in imports, amid stockpiling in readiness for a no-deal Brexit. Accordingly, exports are expected to rebound slightly, despite a persistently weak international environment featuring a major US slowdown and muted Eurozone growth. As the UK economy continues to cool, the number of corporate insolvencies will increase in 2020 (+3%) for the third consecutive year.

The automotive sector will remain one of the most exposed sectors as 80% of its production is dedicated to exports. During the first three quarters of 2019, automotive production collapsed (-15%) owing to the decline in the export segment (-17%). Beyond the difficulties specific to the European market (slacker demand, new environmental standards), the future of the sector will largely depend on negotiations with the EU, which receives half of its exports.

Continued increase in public spending

The 2020 budget is expected to be expansionary, with a further increase in public spending (39% of GDP). Outside the health sector, increases in spending will be allocated to education (GBP 3.8 billion, 0.2% of GDP), defense (GBP 1.8 billion), social affairs and home affairs (GBP 1 billion each). With activity slowing down, and the government not announcing any major savings measures other than the suspension of the corporate tax rate cut, the public deficit is expected to widen in 2020 and public debt will remain high.

The current account will remain largely in deficit, due to the substantial structural deficit in the goods balance (6.7% of GDP in 2018). This is not offset by the significant surplus in services (4.9% of GDP), attributable to financial and insurance services (two-thirds of the surplus) and other business services. The income balance shows a persistent deficit (1.3% of GDP) due to the repatriation of income from significant foreign investments in the country. As the country will continue to contribute to the EU budget during the transition period, the transfer deficit (1.3% of GDP) is expected to remain stable in 2020. The United Kingdom, a key player in the global financial system, finances its current account deficit through foreign investment, mainly portfolio investment.

Boris Johnson’s gamble pays off

Prime Minister Boris Johnson, who has been in power since being elected Conservative Party leader in July 2019, strengthened his parliamentary majority in the December 2019 elections, winning 365 of the 650 seats (50 more than in the previous election). Mr. Johnson’s gamble thus paid off, vindicating his decision to dissolve Parliament, where he inherited a fragile majority negotiated in June 2017 by former Prime Minister Theresa May with the Democratic Unionist Party (DUP), a conservative protestant group in Northern Ireland. Backed by his strong majority, Boris Johnson was preparing at the beginning of January to take the United Kingdom out of the EU on January 31, 2020, following three earlier postponements. If Parliament approves the withdrawal, the UK and the EU will enter a transition period to negotiate the free trade agreement that will govern their future trade relations. While the government may benefit this time around from clear parliamentary support, these negotiations will be long and difficult, given the stakes. They are expected to occupy the bulk of the political agenda in 2020, insofar as, since it will remain a member of the EU customs union during the transition period, the UK will be unable to start negotiating new trade agreements with other partners, such as Australia, India, New Zealand and especially the United States.

Source:

Coface (02/2020)
United Kingdom