Belfast
Cardiff
Birmingham
Liverpool
London
Manchester
Glasgow
Atradius Country Report
United Kingdom – April 2014
Atradius 2
Overview
General information					 Most important sectors (% of GDP, 2012)
Capital:	 	 London	 		 Services:	 78....
Main economic developments
Economic growth will accelerate further in 2014
According to the Office of National Statistics ...
Atradius 4
Consumer confidence is improving
Last year, consumer confidence was boosted by the more optimistic economic out...
Atradius 5
	 Source: IHS Global Insight
As a result, household consumption is forecast to increase by 2.4% in 2014 and a f...
Manufacturing to rebound in 2014
In 2013 manufacturing production contracted by 0.6%. However, the second half of the year...
Government debt continues to rise
The 2008 credit crisis and the subsequent economic downturn pushed government debt up fr...
The insolvency environment
Insolvencies are expected to decrease again in 2014
The economic crisis years of 2008 and 2009 ...
Default risk for UK listed firms continued to decrease in 2013
Given the stronger than expected economic rebound, the mont...
Construction
UK construction began quietly in 2013 but, as the year progressed, there was a distinct improvement: first in...
UK industries performance forecast
April 2014
Atradius 11
Agriculture
Consumer
Durables
Metals
Automotive/
Transport
Elect...
Atradius Credit Insurance N.V
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Atradius Country Report - United Kingdom – April 2014

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Main economic developments
Economic growth will accelerate further in 2014
According to the Office of National Statistics (ONS), in the last quarter of 2013 the UK’s GDP increased 0.7% on the
previous quarter (see chart below) and 1.7% for the full year - well above expectations at the beginning of 2013.

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Atradius Country Report - United Kingdom – April 2014

  1. 1. Belfast Cardiff Birmingham Liverpool London Manchester Glasgow Atradius Country Report United Kingdom – April 2014
  2. 2. Atradius 2 Overview General information Most important sectors (% of GDP, 2012) Capital: London Services: 78.8% Government type: Constitutional monarchy Industry: 20.5% Currency: British pound (GBP) Agriculture: 0.7% Population: 63.4 million Main import sources (2012, % of total) Main export markets (2012, % of total) Germany: 12.6% Germany: 11.3% China: 8.0% USA: 10.5% The Netherlands: 7.5% The Netherlands: 8.8% USA: 6.7% France: 7.4% France: 5.4% Ireland: 6.2% Belgium: 4.4% Belgium: 5.1% Key Indicators ** 2011 2012 2013 2014* 2015* Real GDP growth (y-on-y, % change) 1.1 0.3 1.7 2.7 2.5 Consumer prices (y-on-y, % change) 4.5 2.8 2.6 2.0 2.2 Household consumption (y-on-y, % change) -0.5 1.5 2.4 2.4 2.3 Retail sales (y-on-y, % change) 0.5 -0.4 0.1 0.8 2.3 Manufacturing production (y-on-y, % change) 1.8 -1.7 -0.6 2.6 2.0 Unemployment rate (%) 8.1 7.9 7.6 6.8 6.5 Gross fixed investment (y-on-y, % change) -2.4 0.7 -0.5 7.3 6.5 Real net exports (EUR billion) -16.7 -28.2 -30.6 -34.4 -30.2 Fiscal balance (% of GDP) -7.7 -5.9 -5.6 -5.3 -4.2 Government debt (% of GDP) 71.2 75.4 76.8 79.3 80.8 * forecast Sources: Consensus Economics, IHS Global Insight
  3. 3. Main economic developments Economic growth will accelerate further in 2014 According to the Office of National Statistics (ONS), in the last quarter of 2013 the UK’s GDP increased 0.7% on the previous quarter (see chart below) and 1.7% for the full year - well above expectations at the beginning of 2013. Source: IHS Global Insight, OECD (MEI) Consumer spending was the main driver of growth and should continue to be robust in 2014. This is expected to be accompanied by a rebound in investments, manufacturing production and higher export growth this year, finally putting the economic rebound on a broader basis. GDP growth of 2.7% is forecast for 2014 (see chart below). Source: Consensus Forecasts (Survey date 10 March 2014) (% change on previous year) GDP growth Atradius 3 Main economic developments Economic growth will accelerate further in 2014 According to the Office of National Statistics (ONS), in the last quarter of 2013 the UK’s GDP increased 0.7% on the previous quarter (see chart below) and 1.7% for the full year - well above expectations at the beginning of 2013. Source: Global Insight, OECD (MEI) Consumer spending was the main driver of growth and should continue to be robust in 2014. This is expected to be accompanied by a rebound in investments, manufacturing production and higher expo growth this year, finally putting the economic rebound on a broader basis. GDP growth of 2.7% is forecast for 2014 (see chart below). Bitte Graphik einfügen GDP growth (% change on previous year) Source: Consensus Forecasts (Survey date 10 March 2014) Consumer confidence is improving Last year, consumer confidence was boosted by the more optimistic economic outlook and a reboun in the housing market, with a return to rising house prices having a positive effect on household wealth. (Quarter-on-Quarter percentage change) Real GDP growth 5 4 3 2 1 0 2011 2012 2013 2014* 2015* *forecast 1.1 0.3 2.7 1.8 2.5
  4. 4. Atradius 4 Consumer confidence is improving Last year, consumer confidence was boosted by the more optimistic economic outlook and a rebound in the housing market, with a return to rising house prices having a positive effect on household wealth. Source: IHS Global Insight, ICON That turnaround in the housing market began at the end of 2012 (see below) and has continued to accelerate ever since: according to mortgage lender Halifax, house prices rose 7.9% year-on-year in February this year. However, some analysts are already talking of a new housing bubble, although the rise is not yet so extensive or steep to be a cause for concern. Source: IHS Global Insight Private consumption is expected to grow markedly in 2014 With improved confidence and rising house prices, UK consumer spending should continue on its upward path and stimulate growth in 2014. That trend is also helped by the drop in unemployment in recent months (expected to decrease to 6.8% this year from 7.6% in 2013) and consequently less fear of job loss. Consumer price inflation decreased last year to 2.6%, but wage increases have still not kept pace with inflation, leading to a decline in real wages. However, inflation is expected to fall further in 2014 (to 2.0%), and this should help to improve household spending power – another encouraging sign for household consumption. In February 2014 inflation fell to a four year low of 1.7% Source: Global Insight, ICON That turnaround in the housing market began at the end of 2012 (see below) and has continued to accelerate ever since: according to mortgage lender Halifax, house prices rose 7.9% year-on-year in February this year. However, some analysts are already talking of a new housing bubble, although the rise is not yet so extensive or steep to be a cause for concern. Private consumption is expected to grow markedly in 2014 With improved confidence and rising house prices, UK consumer spending should continue on its upward path and stimulate growth in 2014. That trend is also helped by the drop in unemployment in recent months (expected to decrease to 6.8% this year from 7.6% in 2013) and consequently less fear of job loss. Consumer price inflation decreased last year to 2.6%, but wage increases have still not kept pace with inflation, leading to a decline in real wages. However, inflation is expected to fall further in 2014 (to 2.0%), and this should help to improve household spending power – another encouraging sign for household consumption. In February 2014 inflation fell to a four year low of 1.7% (Index 100 = Neutral) Consumer confidence Source: Global Insight, ICON That turnaround in the housing market began at the end of 2012 (see below) and has continued to accelerate ever since: according to mortgage lender Halifax, house prices rose 7.9% year-on-year in February this year. However, some analysts are already talking of a new housing bubble, although the rise is not yet so extensive or steep to be a cause for concern. Private consumption is expected to grow markedly in 2014 With improved confidence and rising house prices, UK consumer spending should continue on its upward path and stimulate growth in 2014. That trend is also helped by the drop in unemployment in recent months (expected to decrease to 6.8% this year from 7.6% in 2013) and consequently less fear of job loss. Consumer price inflation decreased last year to 2.6%, but wage increases have still not kept pace with inflation, leading to a decline in real wages. However, inflation is expected to fall further in 2014 (to 2.0%), and this should help to improve household spending power – another encouraging sign for household consumption. In February 2014 inflation fell to a four year low of 1.7% (National level index, 2000 Q1 = 100) House prices
  5. 5. Atradius 5 Source: IHS Global Insight As a result, household consumption is forecast to increase by 2.4% in 2014 and a further 2.3% in 2015 (see chart below). Source: Consensus Forecasts (Survey date 10 March 2014) Increased household purchasing power is also reflected in stronger retail sales. According to IHS Global Insight, retail sales will increase 0.8% in 2014 and by as much as 2.3% in 2015 (see chart on page 2). Business confidence has improved After languishing largely unchanged between early 2012 and mid-2013, business confidence in manufacturing increased again in the second half of 2013 (see chart below) Source: IHS Global Insight, OECD (MEI) (Annual percentage change in CPI all items) Consumer price inflation Source: Global Insight As a result, household consumption is forecast to increase by 2.4% in 2014 and a further 2.3% in 2015 (see chart below). Bitte Graphik einfügen Household consumption (% change on previous year) Source: Consensus Forecasts (Survey date 10 March 2014) Increased household purchasing power is also reflected in stronger retail sales. According to IHS Global Insight, retail sales will increase 0.8% in 2014 and by as much as 2.3% in 2015 (see chart on page 2). Business confidence has improved After languishing largely unchanged between early 2012 and mid-2013, business confidence in manufacturing increased again in the second half of 2013 (see chart below) Source: Global Insight, OECD (MEI) Source: Global Insight As a result, household consumption is forecast to increase by 2.4% in 2014 and a further 2.3% in 20 (see chart below). Bitte Graphik einfügen Household consumption (% change on previous year) Source: Consensus Forecasts (Survey date 10 March 2014) Increased household purchasing power is also reflected in stronger retail sales. According to IHS Global Insight, retail sales will increase 0.8% in 2014 and by as much as 2.3% in 2015 (see chart on page 2). Business confidence has improved After languishing largely unchanged between early 2012 and mid-2013, business confidence in manufacturing increased again in the second half of 2013 (see chart below) Source: Global Insight, OECD (MEI) (% change on previous year) Household consumption 5 4 3 2 1 0 -1 -2 2011 2012 2013 2014* 2015* *forecast 1.5 -0.5 2.42.4 2.3 (Manufacturing industry index) Business confidence
  6. 6. Manufacturing to rebound in 2014 In 2013 manufacturing production contracted by 0.6%. However, the second half of the year saw higher production, an inflow of new orders and growing exports. After two years of contraction, manufacturing production is forecast to increase 2.6% in 2014 and 2.0% in 2015 (see chart below). Source: Consensus Forecasts (Survey date 10 March 2014) Activity in the service sector increased throughout 2013, with incoming new business and confidence both buoyant. The construction sector has been boosted by the rise in house prices and the consequent recovery in demand for both residential and commercial construction. A surge in investment in 2014 After a mixed performance in 2012 and 2013, the more settled economic environment should lead to a significant rebound in gross fixed investment of 7.3% in 2014 and 6.5% in 2015. Along with private consumption, investment is therefore expected to become a main contributor to UK economic growth in the next two years, putting the economic rebound on a more stable footing by making it less dependent on private consumption growth. Source: Consensus Economics (Survey date March 10, 2014) Atradius 6 (% change on previous year) Manufacturing production 5 4 3 2 1 0 -1 -2 -3 -4 -5 2011 2012 2013 2014* 2015* *forecast -1.7 1.8 2.6 -0.6 2.0 (% change on previous year) Gross fixed investment 10 8 6 4 2 0 -2 -4 2011 2012 2013 2014* 2015* *forecast 0.7 -2.4 7.3 -0.5 6.5
  7. 7. Government debt continues to rise The 2008 credit crisis and the subsequent economic downturn pushed government debt up from 38% of GDP in 2007 to 75% of GDP in 2012 (see chart below). The fiscal deficit exceeded 10% of GDP in 2009 and 2010 as a consequence of the economic slump and the government’s investment in stimulus measures. Comprehensive austerity measures and tax increases since 2011 have slowly reduced the fiscal deficit to 5.6% of GDP in 2013. Since early 2013 the government has eased its rate of fiscal consolidation to support the rebound, and higher economic growth should make it easier for it to reduce its budget deficit. Last year’s deficit of 5.6% of GDP is expected to decrease to 5.3% in 2014. Government debt continues to creep up: from 76.8% of GDP last year to 79.3% of GDP in 2014. Source: IHS Global Insight; Office for National Statistics In March 2014, the government announced that it plans to reduce the budget deficit further in 2015 and that it envisages a deficit of 0.8% of GDP in the 2017-18 financial year (FY) with a surplus of 0.2% in FY 2018-19. Loose monetary policy continues to support growth Despite consumer price inflation above its target rate of 2% in 2009-2013, the Bank of England has maintained its benchmark interest rate at 0.5% since April 2009. In doing so it is keeping in place its monetary policy of low interest rates to help mitigate the effects of fiscal tightening and to avoid inhibiting growth. The Bank is content with this rate, in view of the need for monetary stimulus for the economy, and has indicated that it will keep the benchmark interest rates at 0.5% until unemployment drops to 7%. In addition to the low interest rate, the Bank has devised a number of schemes to stimulate lending for housing and small businesses. It is therefore expected to continue with its loose monetary policy in the coming year. External position: increased contribution to economic growth In the last quarter of 2013, the largest contribution to economic growth came from net trade, indicating that exports will increasingly contribute to GDP. Together with higher investments, this will put the hitherto consumer spending-driven rebound on a more balanced footing. According to IHS Global Insight, British exports will grow 4.6% in 2014 and 7.4% in 2015, after 2.6% in 2013. The current account deficit is forecast to decrease to 2.3% of GDP in 2015 after 3.1% of GDP in 2014. Atradius 7 Source: Global Insight; Office for National Statistics In March 2014, the government announced that it plans to reduce the budget deficit further in 2 and that it envisages a deficit of 0.8% of GDP in the 2017-18 financial year (FY) with a surplus 0.2% in FY 2018-19. Loose monetary policy continues to support growth Despite consumer price inflation above its target rate of 2% in 2009-2013, the Bank of England maintained its benchmark interest rate at 0.5% since April 2009. In doing so it is keeping in pla monetary policy of low interest rates to help mitigate the effects of fiscal tightening and to avoi inhibiting growth. The Bank is content with this rate, in view of the need for monetary stimulus economy, and has indicated that it will keep the benchmark interest rates at 0.5% until unemplo drops to 7%. In addition to the low interest rate, the Bank has devised a number of schemes to stimulate lending for housing and small businesses. It is therefore expected to continue with its monetary policy in the coming year. External position: increased contribution to economic growth In the last quarter of 2013, the largest contribution to economic growth came from net trade, in that exports will increasingly contribute to GDP. Together with higher investments, this will pu hitherto consumer spending-driven rebound on a more balanced footing. According to IHS Glo Insight, British exports will grow 2.6% in 2014 and 4.6% in 2015, after 0.2% in 2013. The curr account deficit is forecast to decrease to 2.7% of GDP in 2015 after 3.8% of GDP in 2014. (Government debt and budget balance in percent of GDP) Public debt and budget balance: United Kingdom
  8. 8. The insolvency environment Insolvencies are expected to decrease again in 2014 The economic crisis years of 2008 and 2009 saw spectacular year-on-year increases – of more than 20% - in corporate insolvencies. While in 2010 business failures decreased by 16%, this improving trend did not continue in 2011. However, since 2012 the number of business failures has again fallen, and in 2013 the UK Insolvency Service recorded a 7.3% year-on-year decrease in compulsory liquidations and creditors‘ voluntary liquidations in England and Wales, to 14,982 cases. Of those, compulsory liquidations fell 14.9% to 3,624 cases, while creditors’ voluntary liquidations declined 4.5%, to 11,358 cases. Source: IHS Global Insight, The Insolvency Service We expect this positive trend to continue in 2014, with business failures forecast to decrease by around 3%. However, this still puts the number of insolvencies above 2007 pre-crisis levels at around 12,500 cases. Source: The Insolvency Service, Atradius Economic Unit Atradius 8 (1-year trailing sum of insolvency counts based on quaterly data) Insolvency trends: United Kingdom However, since 2012 the number of business failures has again fallen, and in 2013 the UK Ins Service recorded a 7.3% year-on-year decrease in compulsory liquidations and creditors´ volu liquidations in England and Wales, to 14,982 cases. Of those, compulsory liquidations fell 14. 3,624 cases, while creditors’ voluntary liquidations declined 4.5%, to 11,358 cases. Source: Global Insight, The Insolvency Service We expect this positive trend to continue in 2014, with business failures forecast to decrease b around 3%. However, this still puts the number of insolvencies above 2007 pre-crisis levels at 12,500 cases. UK business insolvencies (year-on-year change) Bitte Chart einfügen (excel sheet) Source: The Insolvency Service, Atradius Economic Unit Default risk for UK listed firms continued to decrease in 2013 Given the stronger than expected economic rebound, the monthly median expected default fre (year-on-year change) United Kingdom business insolvencies *forecast 0 % change 0 15,000 15,000 10,000 10,000 2011 5.2% 16,886 2012 -4.3% 16,154 2013 -7.3% 14,982 2008 24.2% 15,535 2007 -4.8% 12,507 2009 22.8% 19,077 2010 -15.9% 16,045 20,000 20,000 2014* -3.0% 14,550 5,000 5,000
  9. 9. Default risk for UK listed firms continued to decrease in 2013 Given the stronger than expected economic rebound, the monthly median expected default frequency (EDF) figures for UK listed companies have decreased since last year: to 0.23% in January 2014 (down from 0.5% in January 2013 - see chart below). This is the lowest figure since autumn 2007. Source: KMV Credit Monitor and Atradius Economic Research *The Expected Default Frequency (EDF) chart above is based on listed companies in the markets referred to, and the likelihood of default across all sectors within the next year. In this context, default is defined as a failure to make a scheduled payment, or the initiation of bankruptcy proceedings. Probability of default is calculated from three factors: market value of a company’s assets, its volatility and its current capital structure. As a guide, the probability of one firm in a hundred defaulting on payment is shown as 1%. Developments in some main sectors Automotive Structurally, the UK’s automotive industry has been well placed to capitalise on both emerging market demand and the move upmarket to more aspirational, premium models. According to the Society of Motor Manufacturers and Traders (SMMT), UK car production increased 3.1% in 2013, to more than 1.5 million units. Four out of five cars built in the UK were sold abroad, with strong demand coming from China, the US and Russia. New car registrations in the UK rose by more than 10% last year, to 2,264,737 units. We expect this sector to continue to profit from increasing global car sales in 2014, as Western Europe economies stabilise and the US economic rebound continues. This may also offset the slowing pace of economic growth in the emerging markets of Asia and South America. There is significant investment in new models and production capacity at a number of UK plants. On average, payments in the UK automotive industry take between 45 and 90 days and this is expected to remain the case in the coming months. Protracted payments in the sector are rare and consequently we have seen fewer notifications of non-payment over recent months. Compared to other UK industries, the automotive sector’s default and insolvency rate is very good, with a stable outlook. Our risk underwriting stance is positive towards all parts of the UK automotive sector - and is even more relaxed than last year. However, third tier component manufacturers and independent specialist vehicle manufacturers represent higher risks than other segments. Atradius 9 (Expected default frequency, percentage points) Median EDF evolution by country* 0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0 0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 Median EDF evolution by country* (Expected default frequency, percentage points) United Kingdom Spain Netherlands Germany Italy France
  10. 10. Construction UK construction began quietly in 2013 but, as the year progressed, there was a distinct improvement: first in the residential building subsector while, in the second half of the year, the infrastructure sector was a key driver of sector growth. We are cautiously optimistic about the future as the strong house building market should help drive a construction recovery in 2014. The commercial sector is also improving and, together with private housing and infrastructure, will help fuel industry growth over the next five years. Payment delays worsened in 2013 as some of the major tier one contractors pushed their terms out to 90 and, in some instances, 120 days. This did the most damage further down the supply chain: in effect, it meant that SMEs were helping to fund the working capital of much larger and more powerful businesses. However, as the anticipated volumes and margins improve in 2014, payment behaviour should also improve and managing cash flow should become easier. We expect construction insolvencies to continue to fall in 2014 - by about 3% - in line with our prediction of an overall decrease in UK business insolvencies (see above). However, we are more cautious about the mechanicals and electrical construction subsectors. In both cases, we had seen desperate tendering price wars during the crisis, with gross margins on contracts under particular strain. This has caused some major insolvencies, with large tier one contractors leaving these sectors due to overcapacity and tight margins. Consumer durables/non-food retail The consumer durables market saw positive growth in the run-up to Christmas 2013. After a subdued performance in earlier years, the consumer electronics subsector enjoyed growth for the first time in two years. The small domestic appliance subsector performed positively throughout 2013, right up to Christmas, and with the improving housing market sales should continue to grow. Furniture traders saw strong demand towards the end of 2013 and the first few weeks of 2014. Sales prices have been maintained, showing that discounting has not been essential to achieve this growth. There is real optimism about the next twelve months as a buoyant housing market should drive this subsector forward. Our outlook for the next six months is cautiously optimistic. With the post-Christmas period - traditionally a time for retail failures - behind us, we have seen just a few recent failures. Insolvencies in the consumer durables/non-food retail sector fell by around 5% in 2013. While not foreseeing a sharp increase in growth rates or improvement in margins for consumer durables retailers, we still expect most to trade well and insolvency rates to level off over the next six months. 2014 will also see further store closures, both within and outside formal insolvency processes, as the growth of online shopping continues to take its toll on ‘bricks and mortar’ retailing. Atradius 10
  11. 11. UK industries performance forecast April 2014 Atradius 11 Agriculture Consumer Durables Metals Automotive/ Transport Electronics/ICT Paper Chemicals/ Pharma Financial Services Services Construction Food Steel Construction Materials Machines/ Engineering Textiles Excellent Good Fair Poor Bleak
  12. 12. Atradius Credit Insurance N.V Postbus 8982 1006 JD Amsterdam David Ricardostraat 1 1066 JS Amsterdam www.atradius.com If you’ve found this country report useful, why not visit our website www.atradius.com, where you’ll find many more Atradius publications focusing on the global economy, including more country reports, industry analysis, advice on credit management and essays on current business issues. On Twitter? Follow @Atradius or search #countryreports to stay up to date with the latest edition. Disclaimer This report is provided for information purposes only and is not intended as a recommendation as to particular transactions, investments or strate- gies in any way to any reader. Readers must make their own independent decisions, commercial or otherwise, regarding the information provided. While we have made every attempt to ensure that the information contained in this report has been obtained from reliable sources, Atradius is not responsible for any errors or omissions, or for the results obtained from the use of this information. All information in this report is provided ’as is’, with no guarantee of completeness, accuracy, timeliness or of the results obtained from its use, and without warranty of any kind, express or implied. In no event will Atradius, its related partnerships or corporations, or the partners, agents or employees thereof, be liable to you or anyone else for any decision made or action taken in reliance on the information in this report or for any consequential, special or similar damages, even if advised of the possibility of such damages. Copyright Atradius Credit Insurance N.V. 2014 Connect with Atradius on Social Media @atradius Atradius atradiusgroup

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