A year after the vote that sanctioned the UK's exit from the EU, the research published by Atradius underlines how the British economy has proved to be surprisingly resilient. After the initial shock, confidence recovered rapidly and consumption continued to support solid economic growth. Also the strong depreciation of the pound helped to support growthespecially favoring exports. However, the downside comes from the fact that the weakness of the pound is starting to weigh on consumer spending: the British currency has lost about 14% against the Euro and the US dollar compared to June 2016. And this has pushed up the cost of imported goods which, together with the rise in the price of oil since the beginning of last year, is driving up the general price level. Last April, annual consumer price inflation stood at 2,7%, the highest level since August 2013. Despite the lowest unemployment rate in 40 years (4,6%) and solid job growth, wages have not kept pace with inflation, partly due to relatively low productivity growth. As of last March, wages grew by just 2,1% year-over-year, suggesting a contraction in real wages or a decline in household purchasing power.
Private consumption contributed 1,8% to GDP growth, which during the first quarter of this year recorded a slowdown of 0,2%: this is the most negative data recorded in the last four years. The slowdown mainly affected industries most dependent on consumption, such as hotels and retail, although this could be partially offset by the increase in foreign visitors attracted by the weakness of the pound. And if the household savings rate remained at low levels (only 3,3% in the fourth quarter of 2016), in 2017 consumer credit conditions should become more restrictive for the first time in six years.
For the moment, economic growth should still be able to count on the increase in public consumption and on the positive contribution provided by the external balance, thanks to the increased competitiveness of exports, for stable GDP growth expected at around 1,7%. Business investment has performed better than expected and is expected to remain stable this year, thanks in part to the long-term nature of most investment and confidence in the UK economy. However, with the negotiations with the EU now in full swing, analysts expect an increase in the climate of uncertainty which could have a more negative impact on consumption and investments in 2018.
According to the data of UK Insolvency Service, in the first quarter of this year, 3.967 companies went into insolvency, indicating an increase of 4,5% compared to the same quarter of 2016 and 5,3% on an annual basis: this is the third consecutive quarter of growth in the number of insolvencies. The analysis by sector of activity shows how, last year, insolvency cases were concentrated in the construction, retail and hotel sectors. The construction sector is, in general, responsible for the largest share of insolvencies due to the large number of firms and strong competition, not to mention that, with the depreciation of the pound, these firms are also exposed to rising import costs of raw materials. The retail and hospitality sectors are also expected to see an increase in insolvencies in 2017 and 2018 due to the decline in consumption. These sectors will also have to contend this year with the entry into force of the National Living Wage (the statutory minimum wage) and with the extension of the automatic pension scheme to small businesses. Furthermore, foreign exchange hedges, which had sheltered many businesses from sterling swings in the aftermath of the referendum, are starting to expire and this could expose more businesses to higher import costs for goods and services. Despite this, the trend in insolvencies has seen an improvement in some sectors: last year the weakness of the pound supported the agricultural sector, favoring an 8% drop in insolvencies in this sector. The weak currency has also supported the manufacturing sector, as it has made British-made goods more competitive in overseas markets (insolvencies fell by 5% in 2016). British exports are also benefiting from stronger growth in the Eurozone.
However, insolvency forecasts for the UK in 2017/2018 remain negative. Consumption-dependent sectors account for a large share of the economy as services contribute about 80% of GDP, while the industrial sector contributes only the remaining 20%. Analysts expect the current trend to continue for the rest of the year: the total number of insolvency cases in the UK is expected to grow by 6% this year and 8% in 2018.
In terms of economic and financial ties with the UK, the most vulnerable countries are Ireland, Holland and Belgium, followed by France, Germany and Spain. In addition to the direct impacts, growing uncertainty could weigh on the level of confidence and financial conditions in the UK and the EU, with repercussions that theOECD estimated the loss of 1 percentage point on GDP growth in Europe in the two-year period 2016/2018 compared to the reference scenario without Brexit. And, since insolvencies are closely aligned with the business cycle, changes in GDP growth have an effect on the pattern of insolvencies, with a similar increase in insolvencies, particularly in markets most exposed to the UK.
All in all, the United Kingdom imports a significant share of added value from Europe in the chemical, transport and textile sectors. Domestically, industries that are not dependent on exports, such as construction and financial services, are shielded from any repercussions. If, on the other hand, we take a look at the different countries, the most negative impact of sterling weakness and slowing UK growth is reflected in Ireland, given strong economic, geographic and historical ties, where insolvencies are expected to rise by more than 2,5%. Followed by the Netherlands and Belgium, where insolvencies are expected to increase by 1,3% and 1,2%, respectively, with the remaining European countries expected to experience a very limited impact.
