Population 63.065 million
GDP 2433.779 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
1.8 |
0.9 |
0.2 |
0.4 |
|
Inflation (yearly average) (%)
|
3.3 |
4.5 |
2.9 |
3.2 |
|
Budget balance (% GDP) *
|
-10.2 |
-8.2 |
-6.9 |
-7.7 |
|
Current account balance (% GDP)
|
-3.3 |
-1.9 |
-3 |
-3.5 |
|
Public debt (% GDP)
|
79.4 |
85 |
89.8 |
93.7 |
| (e) Estimate (f) Forecast * grants excluded | ||||
STRENGTHS
- Bank of England’s flexible monetary policy
- Hydrocarbon production covering three quarters of energy needs
- Government’s commitment to improving public finances
WEAKNESSES
- Heavy dependence of the economy on financial services
- Instability of the coalition government over the European question
- High public debt and deficit levels
- Record level of private debt
- Weak banking system
- Growing share of the young in the unemployment figures, a source of social tension
Risk assessment
Weak recovery in 2013 after contraction in 2012
The good third quarter performance in 2012, largely due to the holding of the summer Olympic Games, did not prevent the economy contracting over the year as a whole, with foreign trade largely contributing to this deterioration. The recovery will be modest in 2013: household consumption, private investment and exports will grow only weakly, while public investment will stall significantly.
Austerity will weigh heavily on consumption and investment will be curtailed
The effects of the draconian austerity programme launched in 2010 by the coalition government will intensify in 2013: deficit brought down by 4.8% by the end of fiscal year 2013 -2014 (the scheduled total consolidation is to reach 9.2% of GDP over 8 years). Unemployment should rise to 8.3 % of the active population and real average wages are expected to continue to contract, in line with the resurgence of the inflation rate above Bank of England's target. Household consumption should, therefore, remain weak, especially as the level of debt will remain high (145% of disposable income in 2012 and net wealth below pre-crisis levels despite the BoE's unconventional monetary policy. For all these reasons households are expected to maintain their saving rate around 8% of disposable income as a precaution, to the detriment of spending. Moreover, it is not certain that the Funding for Lending Scheme introduced by the BoE and the government (boosting lending by lowering interest rates charged by financial institutions which benefit in return from regulatory easing) is significantly sustaining the supply of credit to households beyond the trend observed in 2012. Conversely, this programme could favour company investment by supplementing the cash flow support provided by the £20bn Supply Chain Finance Scheme aimed at small and medium-sized businesses. But the essential springs for a marked revival of investment (domestic and external demand) will remain relatively weak, which will limit the positive impact of these various public programmes. The government announcement at the end of 2012 of a £5bn package for infrastructure renovation is also expected to have a limited impact on investment in building and public works, this amount corresponding more or less to unused budget items.
The government is wavering between the need to meet its commitments to stabilise public finances and to alleviate the negative effects of austerity on fiscal income. This policy could result in social discontent likely to undermine the Conservative – Liberal Democrat coalition.
Contribution of external trade to growth less negative in 2013
In 2012 British exports suffered particularly from the recession in the eurozone, the main trading partner (54% of total sales). In 2013 muted activity in Germany (13.3% of total exports) and France (7.5%), the Netherlands’ emergence from recession (8%) and the expected slowdown in the United States (11%) are unlikely to allow a significant export recovery. Exports will, however, stop contracting, benefiting from the sterling pound depreciation even if their price elasticity has proven weak. Imports will grow only slightly due to household and business caution. Activity will, therefore, be less constrained by external trade in 2013.
The number of bankruptcies is around 40% above the pre-crisis level
The financial situation of businesses has improved to the point that one can see a return of large companies to the bond market. Outstanding loans to SMEs, for their part, remain very depressed. Several sectors are especially vulnerable: agro-food producers, whose margins are shrinking due to the dual effect of higher commodities prices and household spending patterns. Thus, over 80% of food purchases are made in relation to promotions, to the detriment of supplier’s margins. Construction also needs watching, with social housing projects remaining suspended and firms’ working capital under pressure. In this context the Supply Chain Finance programme could help to limit the growth of bankruptcies as over forty large companies have agreed to allow their banks to settle suppliers’ invoices without delay. This improvement is reflected in the 4% decline in bankruptcies in 2012 (compared to 2011). The level is though still over 34% higher than that observed before the crisis, as it is reflected in Coface’s payment record.
