Coface highlights the biggest risks and opportunities for UK Businesses in 2021
We all learned from bitter experience not to look too far ahead last year as successive waves of the coronavirus scuppered the permanent lifting of lockdown restrictions. However, the vaccination programme offers a chink of light for companies that want to plan for the post-pandemic world.
Of course, trading uncertainty has not disappeared so it is important to have an informed perspective on credit risk which enables your business to strike the right balance between potential risk and reward.
These insights from Coface’s latest analysis of global trading risk are a great place to start if you want to understand the positive indicators for the UK, as well as where risk mitigation measures are necessary.
The positives:
1. The UK’s vaccination programme is in the advanced guard
The World Health Organisation (WHO) has estimated that at least 60 to 70% of the population needs to have to have immunity from COVID to break the chain of virus transmission. With almost 20 million people having received their first dose of the vaccine and other priority groups set to be vaccinated by the end of April, the UK is well-placed to reach the target before the end of the year. There remain concerns of course – the discovery of new resistant variants, for example – but getting on top of the disease is the quickest route to lifting restrictions on business activity and reviving the economy.
2. Expected increase in household consumption of goods and services
Last year, the UK experienced a peacetime slump on an unprecedented scale and many people have experienced hardship. However, overall household purchasing power has been relatively unaffected because of support measures such as furloughing and the self-employed support scheme. Plus, according to analysis by the Office for National Statistics, lockdown restrictions meant more than one-fifth of usual household spending had not been possible. There is therefore likely to be significant pent-up demand which will be a major driver of recovery as lockdown is eased in the coming months.
3. Growth prospects in pharmaceuticals, ICT and renewables sectors
Not all sectors were severely affected by the pandemic. Most obviously, the pharmaceuticals industry has benefitted from the demand for therapeutic drugs which would be effective for patients with COVID-19 as well as focus on developing testing capacity and vaccines. ICT and particularly the media segment has also been resilient, thanks to the growing appetite for services such as entertainment and online meeting apps. Semiconductor shipments (a component used in ICT products) also began to increase by the second half of 2020, another positive sign. There is also potential for growth and investment in the renewables sector, with the forthcoming COP26 Summit in Glasgow later this year and the added impetus provided by a change of US administration.
4. Early recovery in China
Relations between the UK and China have been strained by developments in Hong Kong, human rights concerns and the Government’s decision to exclude Huawei from 5G but the country remains one of our most important trade partners. China was comparatively successful in suppressing the virus and is ahead of the pack in its recovery phase, partly thanks to the strength of its tech sector but also thanks to an upturn in consumption by high-income households which should provide opportunities for exporters of luxury goods. Trade relations with the US remain tense but should be less confrontational in the Biden era.
Reasons for caution
1. Brexit frictions
The UK government agreed a Brexit deal at the 11th hour which preserves tariff and quota-free trade for most sectors. However, the transition is proving painful for many businesses that export to the EU who have struggled with new administrative procedures and border checks. The Government has announced a support fund for small businesses and is currently in talks with the EU to address concerns but these could take months to resolve.
In addition, some sectors will be directly affected by tariffs and new restrictions. For example, the requirement for exported goods to have local content presents problems for automotive sector. Equally, it could be an opportunity for UK manufacturers to provide parts to UK-based manufacturers which are currently supplied from Turkey or Japan.
2. A likely spike in insolvencies
Financial support for companies in the UK and overseas and the temporary changes to insolvency procedures has protected many companies that might otherwise have failed. Despite the deepest global recession since 1946, corporate insolvencies in 2020 fell by 12% worldwide (and by 28% in the UK). Without these public support measures, Coface estimates that insolvencies would have increased by 36% globally. Inevitably, many of the companies on life support are likely to struggle once this is withdrawn and loans become due for repayment. Coface expects insolvencies to rise sharply this year, making it all the more important to protect your receivables against the financial shock of a bad debt.
3. Pandemic drag on the UK’s dominant service sector
The UK’s service-oriented economy has been hit particularly hard by the impact of COVID-19. According to the latest ONS Business Survey, more than half of businesses in the ‘other services’ (eg hairdressers), accommodation and food sectors had cash reserves of three months’ or less. By comparison, 45% of businesses in the information and communication industry had more than six months’ cash reserves. Inevitably, companies operating in the service sector will be at higher risk of failure so it makes sense to monitor these customers closely and consider insuring this segment of your turnover.
4. Very high risk: automotive, transport and textiles
Certain sectors have been hit particularly hard by the combined impact of the coronavirus and Brexit. We have already mentioned the automotive industry which Coface has assessed as very high risk of default. Other sectors in this category are textiles/clothing, energy, metals and transport (downgraded in January). Not every company in these sectors represents a poor prospect (just as some in ‘low risk’ sectors can still be vulnerable) but risk mitigation is advisable as the situation can change very quickly. Consider obtaining credit reports for new customers, carry out regular credit checks and monitor payment behaviour closely. Talk to Coface about the credit insurance options to protect your business from default or protracted late payment.
For a more detailed analysis of trade risk trends, check out Coface’s 2021 Country and Sector risk Handbook and our latest quarterly barometer report.