The calm before the storm in the UK economy

According to a new report from Euler Hermes, the UK economy is set for prolonged uncertainty which is expected to trigger bouts of nervousness in H1 2017. The resilience of the UK economy following the EU referendum is masking longer term issues that are set to hinder GDP growth, corporate profitability and exacerbate late payment and insolvency issues once Article 50 is triggered.

It has also identified the second quarter of 2016 as the tipping point at which UK corporate insolvencies started to increase, following 16 consecutive quarters of decline. The immediate risk of recession was delayed by the rapid appointment of the new Prime Minister and effective use of monetary policy. However, future growth prospects and UK attractiveness to future overseas investment are already depressed by uncertainty about the Brexit process.

The depreciation in sterling will continue to exacerbate corporate issues as a high proportion of components for a range of UK manufactured-products need to be imported – leading to upward pressure on costs and prices, and mitigating any benefits for exporters. Euler Hermes has also predicted that the sterling will collapse to parity with the euro in 2018. The resulting squeeze on cash flow and profits is likely to worsen payment behaviour, as companies try to preserve working capital by extending payment terms and deadlines as sterling depreciates and domestic activity slows.