Strategy & Operations » UK economy 2021: A bumpy road ahead

They say breaking up is hard to do. In the case of the UK and the European Union (EU), it has been a complex and messy business due to the posturing and brinkmanship from all parties that pushed trade negotiations to the wire, with tensions still high amid the vaccine rollout.

The end of the Brexit transition period was particularly unfortunate to coincide with the pandemic and the start of another lockdown. While many commentators predicted some short-term financial pain as part of the divorce process, businesses hoped for any decline in activity to have been short-lived. The unprecedented disruption caused by the pandemic, however, means that is unlikely to be the case.

Our research suggests GDP growth in the UK is likely to be limited to just 2.5 percent this year, starting from a relatively low base given the impact of the pandemic on overall trade last year. This increase accounts for the UK experiencing a double-dip recession in Q1 at the very least – to the tune of 1.1 percent in lost GDP – as the latest national lockdown continues to hamper trade expectations.

With a slow release expected through the course of the spring, we may not see things roaring back immediately. However, the rollout of the vaccination programme and the lockdown exit plan should reduce the likelihood of the brakes being re-applied as they have been over the past 12 months.

Chief among the issues facing the UK economy is the impact of Brexit on its exporters. Our data indicates that export-focused businesses could see sales fall by as much as £25bn this year due to weak demand and increased red tape.

While the deal agreed before Christmas has its advantages, non-tariff barriers could eventually amount up to 10% due to the exit from the Customs Union. Industries like financial services are also still waiting for an ‘equivalence status’ from the EU, which could take much longer than the six months discussed.

By comparison, greater preparedness and a six-month transition period is likely to limit EU losses to less than £9bn, with the major trading nations hardest hit despite the losses representing less than 0.5 percent of their total exports.

With this in mind, the UK government has created a landmark State Support Scheme to support liquidity and sustain intercompany trade. However, the guarantees provided by these schemes can only go so far in enabling businesses to trade confidently through the recovery and will inevitably be phased out in the long-term.

UK businesses will therefore need to consider how they can sustainably capitalise on the supercharged growth that is likely take hold of the global economy in the second half of this year once vaccination programmes take effect.

One of the upsides is that the disruption brought about by the pandemic has already forced businesses to consider diversifying their supply chains or bring them closer to home. For example, more than a third (35 percent) of UK firms are looking to secure domestic suppliers – a significantly higher rate than in countries like France, Germany and Italy – which bodes well for those trading or manufacturing goods.

However, risks remain, including the insolvency chain reaction which can be triggered if a business within a supply chain goes bust. One firm’s inability to meet its obligations can trigger a knock-on effect through trading networks, along the linkages between companies, sectors and countries, ultimately leading to other payment defaults and insolvencies.

Businesses should be moving to put contingency plans in place if they haven’t already. From the finance department’s perspective, this means keeping an eye on the health of suppliers (particularly in terms of speed of payment) and export-related cashflow. Including trade credit insurance within any plan is a helpful tool to reduce risk and shield firms from the impact of supply chain failures, particularly as we are likely to see an increase in insolvencies this year should government support be eased as currently planned.

 

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