After more than three years since the UK voted to leave the EU, the UK and European Union have parted company with a structured withdrawal agreement. On Friday 31 January 2020, the UK’s exit became a reality. While attention now turns to the future trading relationship between the UK and Europe, the near-term economic impacts for the UK continue to bring difficulties to businesses.
The UK can begin to negotiate new trade agreements in earnest now that the Brexit date has past – the most important of which being the future trading relationship with the EU. The current trading arrangements remain in place until 31 December 2020. However, this short timeline makes it more likely that only a limited future deal is plausible, which could potentially spell a painful adjustment in 2021. Further, should the two parties fail to negotiate a trading agreement by the end of the transition period, they risk falling back on WTO rules. The pressures on the economic environment and the underlying uncertainties continue to take a toll across the UK and all EU markets.
The long period of uncertainty has created a climate of negative sentiment, and this will likely persist in 2020 in the absence of details about the UK’s future trading relationship with the EU. After stagnating in 2019, we expect UK business investment to stay flat again this year amid low confidence and high uncertainty. UK economic growth is forecast to slow to only 1.0% in 2020, cushioned to some extent by fiscal and monetary support from central sources. Many firms already significantly debilitated by the volatile conditions since the 2016 referendum remain at risk of insolvency.
Business insolvencies in the UK increasing further
Insolvencies can be expected to continue to rise in the UK, up 7% or higher in 2020. Similarly, we can expect to see a rise in business failures throughout most of Europe, albeit at a more moderate rate. Insolvencies in the UK have been growing significantly since 2018, increasing another 8% year-on-year in 2019. The retail sector continues to face more bankruptcies due to lower consumer confidence and the changing dynamics within the sector. Heavily dependent on seasonal opportunity, retailers often look to December sales to bolster performance. However, total retail sales fell overall in November and December, according to industry body the British Retail Consortium.
For British sectors dependent on imports, in particular food & agriculture, Brexit remains a factor with the threat of higher import and logistics costs which they could struggle to absorb. The construction sector is already challenged by weak investment. The threat of increasing costs in order to attract workers and the loss of skilled labour from EU nationals working in the UK could further elevate the risk of insolvency.
More moderate impact on the EU, but downside risks have increased
The impact on insolvencies in the rest of Europe will be more moderate; with those countries with the closest trading ties to the UK more likely to be at risk, for example Ireland. The impact on insolvencies for other important trading partners, such as Belgium, the Netherlands and Denmark, as well as the rest of Europe, is expected to be visible but more limited. However, the climate remains volatile, and overall the risk of business failures rising outweighs the likelihood of a more modest impact. Industry sectors with strong reliance on exports to the UK, such as automotive, textiles and high-tech goods can be expected to be more significantly impacted.
While the overall economic outlook remains subdued, individual businesses continue to report success stories and the opportunity for trade growth, both during and beyond the transition period, should not be underplayed. One of the keys to success is a robust risk management strategy that combines access to reliable business intelligence to enable informed decision making and the ability to protect the business from trading risks.
By trade credit insurer Atradius