United Kingdom Country Risk Report (Updated Oct. 2022)

Britain great again?

AA1

LOW RISK for enterprise

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

Updated in July 2024.

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GDP	USD3070.7 bn (World ranking 6, World Bank 2022)
Population	67.0mn (World ranking 22, World Bank 2022)
Form of state	Constitutional Monarchy
Head of government	Keir Stamer (Prime Minister)
Next elections	2029 (general)

Strengths & Weaknesses

High trade balance surplus on services
Healthy banking sector
Diversified export structure
Friendly business environment
Well positioned for AI roll-out

High twin deficits
High public debt
Lower economic attractiveness post Brexit
Low productivity growth
Weak National Health Service

Economic Overview

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Cyclical rebound strengthening

The newly elected Labour government is taking over an economy that is picking up pace after a dismal 2023, when GDP barely grew at all (+0.1%), hit by the combination of high inflation and tight financial conditions eating into households’ disposable income, the housing market and corporates’ earnings. However, the economy started to recover strongly in H1 2024, buoyed by investment and accelerating household consumption. Inflation has dropped significantly, primarily driven by rapidly declining energy prices and softer food and goods inflation. This has been a welcome development for the UK economy at an aggregate level as lower price pressures are being driven by lower imported costs, supported by the appreciation of the sterling.

Furthermore, easing inflation has led to expectations that the Bank of England will start to ease monetary policy soon. This has already translated into easier access to credit and the bond market for corporates. In the housing market, the number of mortgage approvals is firming up. In all, we expect UK GDP to grow by +1.3% this year as financial conditions should continue to ease, followed by +1.9% in 2025, benefiting from the fiscal boost. However, should the Labour government decide to revert to a more ambitious program, stepping up plans to control immigration and implement further labor protections, growth could reach a trough of +0.7% in 2026, less than half of what it would have been under the baseline scenario, while inflation would stay above 3% as the sterling would depreciate by -7% to -10%.

The Bank of England will move cautiously amid sticky services inflation. While they are softening, core domestic price pressures, wage growth and services inflation are not compatible with inflation at 2% on sustainable basis. In this context, the BoE will want to maintain a hawkish bias until wage growth and services inflation normalize. The good news is that the labor market is cooling, signalling lower wage growth over the coming months. The BoE rate should reach 4.75% (from 5.25% currently) by the end of 2024, and 3.75% by the end of 2025.

After a hiatus during the pandemic, corporate risk in the UK is back with vigor as insolvencies are set to remain well above pre-pandemic levels in both 2024 and 2025. UK companies have showed resilience, managing to grow their margins even amidst the pressures of increasing labor costs, but tight financing conditions have put them under pressure.

Labour government: facing a challenging fiscal backdrop

We expect pragmatism and fiscal discipline to take precedence over higher public spending, at least in the first part of the mandate, with more ambitious policy changes likely only after 2025. Based on electoral pledges, the Labour government is expected to increase green investments by around GBP5bn (five times less than initially planned) and NHS spending by GBP1.1bn, besides setting up a National Wealth Fund of GBP7.3bn, spending GBP1.1bn per year on the home-insulation scheme and GBP2bn in building 1.5mn new houses over five years. It also plans to set up a state-owned renewable energy company, “Great British Energy”, for a cost of GBP1.7bn.

However, the new government inherits a difficult fiscal backdrop: The UK’s debt-to-GDP ratio reached 101.3% in 2023 and the public deficit widened to -6% of GDP (after -4.7% in 2022). According to the Office of Budget Responsibility (OBR), the next government will have fiscal headroom of just 0.3% GDP to ease policy. We expect the Labor government to use up this headroom in 2025 through higher spending, which will support growth. Moreover, we expect that planned cuts in real spending for non-essential items will be ditched. The public deficit would be reduced to -5.7% of GDP in 2024, thanks to the cyclical recovery supporting receipts, and -5.8% in 2025 as the government loosens policy. From 2026, the fiscal rule will require the government to start consolidating and we would expect tax increases (as outlined in the manifesto) to fund higher spending and reduce the deficit. In total, based on the electoral pledges, we expect a modest fiscal consolidation of GBP15bn (0.5% of GDP) per year, to start in 2026.

The UK economy remains particularly vulnerable to fluctuations in foreign exchange rates, with around 50% of its import prices being influenced by currency dynamics, notably higher than in France and Germany. This high sensitivity stands in stark contrast to the export sector, where the benefits of a weaker currency are limited due to a substantially lower passthrough effect.

Strong business environment but weaker since Brexit

Under the new Labour government, policy towards investment could become more favorable, especially on ambitious homebuilding plans which are supportive of the economy’s potential growth. The UK should also maintain an overall pro-business policy stance, as reflected by the Chancellor of the Exchequer’s push to incentivize domestic and foreign firms to increase investment in the UK.

Despite the rise in corporate tax from 19% to 25% in 2023, the UK’s rate is still lower than that of the EU’s largest economies. However, Brexit has worsened the UK’s terms of trade, notably as the sterling has suffered from a strong depreciation.

The UK continues to negotiate further trade agreements post-Brexit, seeking to strengthen its global trade network. A notable advancement is an anticipated Free Trade Agreement (FTA) with India, though negotiations remain ongoing. This effort is part of a broader strategy as the UK adapts to new trade dynamics outside the EU. A number of FTAs have been established in recent years, including with Australia (December 2021) and New Zealand (February 2023). In addition to these, the UK joined the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in July 2023, linking it with an important Asia-Pacific trade bloc of 11 countries. In the digital trade sector, the UK has finalized agreements with Singapore, effective from June 2022, and with Ukraine, signed in March 2023.

Trade structure by destination/origin

(% of total, 2022)

Exports	Rank	Imports
United States 12.1%	1	13.4% China
Netherlands 8.3%	2	11.9% United States
Germany 7.8%	3	8.6% Germany
China 6.7%	4	6.5% Norway
Switzerland 6.6%	5	4.2% France

Trade structure by product

(% of total, 2022)

Exports	Rank	Imports
Gold, non-monetary (excluding gold ores and concentrates) 13.8%	1	8.7% Road vehicles
Petroleum, petroleum products and related materials 8.5%	2	8.6% Petroleum, petroleum products and related materials
Road vehicles 7.3%	3	7.3% Gas, natural and manufactured
Power generating machinery and equipment 7.2%	4	5.2% Gold, non-monetary (excluding gold ores and concentrates)
Medicinal and pharmaceutical products 5.5%	5	4.5% Electrical machinery, apparatus and appliances, n.e.s.

Collection Complexity

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Contacts

Maxime Darmet

Senior Economist for the US and France

maxime.darmet@allianz-trade.com