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The messy part is still ahead, as the U.K. and EU build a new trading relationship. The current agreement will remain until the end of 2020 — a short timeline that increases the likelihood of a limited future deal, which would bring a difficult adjustment.
The U.K.’s smooth departure from the EU allows the terms of trade to continue unchanged until December 31, 2020, but does little to reduce uncertainty. Uncertainty is never good for business; it creates an atmosphere of negative sentiment, spooking business leaders into delaying investments, and ultimately leading to an increase in insolvencies. This will continue to put upward pressure on insolvencies this year, and offers very limited time for supply chains to adjust.
In the wake of Brexit, Atradius economists predict the following will occur:
U.K. economic growth will be stagnant throughout 2020. U.K. business investment already stagnated in 2019, and Atradius economists predict more of the same for 2020. Likewise, U.K. economic growth is predicted to slow to 1% this year. If not for fiscal and monetary support from central sources, the growth outlook would likely be even more dismal.
U.K. insolvencies will increase. Numerous firms, already weakened by the volatility that’s occurred since the 2016 referendum, are at risk of insolvency. Poor economic growth could lead to a continued creep upward of U.K. insolvencies of 7% or more in 2020. This is a continuation of a trend that’s stuck around since 2018, with insolvencies increasing 7% year-on-year in 2019.
The retail sector has been hit especially hard, thanks to depressed consumer confidence, not to mention the changing nature of retail overall. For example, according to the British Retail Consortium, 2019 was the worst year for retail in more than two decades.
Other sectors that will likely struggle post-Brexit are those that are dependent on imports, such as food and agriculture. Costs for imports and logistics will increase, and many firms might not be able to absorb the extra burden.
Finally, construction firms in the U.K. face challenges. Investment in the sector is already weak, and with the loss of skilled labor from EU nationals, U.K. firms will have to face higher labor costs as well.
EU insolvencies will increase modestly. The impact of Brexit on EU firms will be moderate, but downside risks remain. Just as in the U.K., business failures will rise, but not as drastically. Ireland is at particularly high risk, given its very intimate trading ties with the U.K. Other important trading partners (including Belgium, the Netherlands, and Denmark) are also at risk, but the damage will likely be more limited there. Sectors that rely heavily on export to the U.K. — automotive, textiles and high-tech goods, to name a few — will be the ones most significantly impacted.
While Brexit-related uncertainty continues to challenge businesses’ bottom lines in the short term, firms should be preparing for the end of the transition period. Both London and Brussels are seeking a deep and comprehensive free-trade agreement for goods and services, but the U.K. has shown commitment to leaving the customs union, marking the introduction of significant barriers to trade. Both British and European importers and exporters must prepare to deal with more customs paperwork and additional costs. When appropriate, supply chains should already begin adjusting to reduce costs and ensure timely delivery of goods and services. Opportunity for trade growth remains, even during the transition period. A strong risk-management strategy will be key to success. Firms in the U.K. and EU should watch for signs that their trading partners are in financial difficulties, and have contingency plans in place for alternative supply chain partners.
Dana Bodnar is an economist at Atradius.
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