United Kingdom Sector report

February 2021

Sectors @ a glance

Industry performance outlook

Agriculture

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Automotive/ Transport

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Chemicals/Pharma

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Construction/ Const. Materials

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Consumer Durables

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Electronics/ICT

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Financial Services

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Food

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Machines

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Metals

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Paper

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Services

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Steel

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Textiles

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Agriculture

The arrows in this overview represent the direction of change in the Atradius outlook for the industry since the previous update. No arrow will appear if there has been no change in our overall outlook.

Remains Poor The continuing supply of labour issues, exacerbated by the coronavirus pandemic, has created challenging market conditions for the UK agricultural sector. The outcome of the trade agreement with the EU for agriculture remains to be seen, but it represents a positive outcome compared to the alternative of ‘no deal.’ Agriculture value added is forecast to increase by about 1.5% in 2021 after an estimated 1% contraction in 2020.

Automotive/Transport

Remains Bleak Supply chain disruptions negatively impacted manufacturing capability and stock availability, with shortages and lengthened factory shutdowns throughout the sector in early 2020. Car production decreased 29% in 2020. With a still subdued demand outlook for automotive across the globe, the sector has entered a protracted period of depressed revenue generation. Even if a rebound occurs, the outlook will remain subdued for smaller suppliers in the Tier 2 segment, as many OEMs are phasing out the one-engine combustion model and shifting to increased production of electric vehicles. Currently automotive value added is forecast to rebound 19.5% in 2021, only partly compensating the whopping 39% contraction in 2020.

The EU-UK trade agreement alleviates a long period of uncertainty and, compared to the alternative of ‘no deal,’ represents a positive outcome. However, it introduces non-tariff barriers in the form of customs bureaucracy and some regulatory barriers. It remains to be seen if this could hamper the just-in-time delivery of parts from EU suppliers and lead to higher stocks, thereby increasing costs (as on average, approximately 60% of components in UK-made cars are imported from the EU). Due to comprehensive government measures implemented to support the economy, an increase in payment delays and insolvencies has not yet materialised. However, insolvencies are expected to increase after the abatement or expiry of the aforementioned fiscal measures.

Chemicals/ Pharmaceuticals

Remains Fair While the petrochemicals segment has suffered from extreme oil price volatility, the recent rebound in oil prices is of some comfort. Other chemical subsectors were affected by sharply decreasing demand from key buyer industries like automotive. Chemicals value added is forecast to rebound by 3% in 2021 after an estimated 4.5% decline in 2020. Pharmaceuticals value added is forecast to grow 7%, due to increasing health expenses.

Construction/Construction Materials

Remains Poor Brexit-related uncertainty and reluctance of investors had a negative effect on industry performance before the coronavirus outbreak. The massive economic downturn in 2020 has severely impacted construction, with value added estimated to have declined 17.5%. The sector is characterised by fierce competition, especially at the lower end of the value chain. Liquidity remains an issue, with difficulties accessing bank finance. The issue of protracted payments and payment delays will always be prevalent in this sector. Due to comprehensive government measures meant to support the economy, an increase in payment delays and insolvencies has not yet materialised. However, insolvencies are expected to increase after the abatement or expiry of the previously mentioned fiscal measures.

Consumer Durables

Remains Bleak Many brick-and-mortar retailers already faced severe troubles before the coronavirus pandemic, suffering from high operating costs, decreasing turnover and increasing competition from online retailers, all of which have led to deteriorating margins. The level of shop closures and insolvency of larger retailers seen in 2020 was at its highest since 2012. The ongoing shutdown of retail operations due to the lockdowns has caused additional financial distress for weaker players, and more insolvencies and business closures are likely this year. A major wave of business failures is expected after the abatement or expiry of fiscal and monetary measures intended to support businesses.

With the aggressive roll-out of the vaccine, a relaxation of social distancing measures is expected in Q2 of 2021, allowing for a rebound of retail through the rest of the year. However, this could be hampered by subdued consumer sentiment and rising unemployment. Private consumption is expected to rebound by 6% in 2021, but contracted 12% in 2020.

Electronics/ICT

Remains Poor The industry suffered from supply chain disruptions in the first months of 2020, but demand for some segments/products (e.g. related to remote working) has proved exceptional. Therefore, a real emphasis has to be placed on assessing each individual company’s business performance and credit risk situation. After an estimated 7% contraction in 2020, ICT value added is forecast to grow 3% in 2021.

Financial Services

Remains Fair The sector remains resilient for the time being, but it could potentially be impacted by increased financial troubles for businesses and consumers alike, leading to increased non-performing loans and deteriorating profits. Finance sector value added is forecast to level off in 2021 after an estimated 3% contraction in 2020. While the EU-UK Free Trade Agreement provides for tariff-free bilateral trade in goods, little has been arranged for financial services.

Food

Remains Poor Over the past couple of years, exchange rate volatility and its impact on costs of commodities and food items has been an issue for many British food producers and processors reliant on imports. The increasing market success of discounters has put pricing under pressure and weighed on suppliers along the food supply chain. Due to an inability to absorb higher input costs and increased pressure on margins, both payment delays and insolvencies increased in 2020. Food value added is forecast to increase by about 2% in 2021 after an estimated 5% decline in 2020.

Machines

Remains Fair The sector has been rather resilient so far, with most businesses in a stable financial situation. However, subdued global and domestic demand from key domestic buyer industries like automotive and construction remains a major downside risk.

Metals

Remains Bleak Following a subdued performance in 2019, the sector’s supply chain and individual businesses’ abilities to trade in H1 of 2020 were severely affected by the coronavirus pandemic. As this industry is highly reliant on working capital financing, the downturn in trade has exacerbated underlying liquidity problems of businesses. Metal manufacturing value added is forecast to rebound by just 1.5% this year after an estimated 13.5% contraction in 2020.

Paper

Remains Poor Paper producers and printing are structurally impacted by the ongoing digitisation process. Supply chain disruptions due to lockdown measures have had a negative effect. Paper value added is estimated to have shrunk by 5.5% in 2020, followed by another 3% contraction forecast in 2021.

Services

Remains Bleak With the UK economy being mainly service sector driven, the lockdown measures and the sharp deterioration of GDP growth directly impact this industry´s performance, with hotels restaurants, tourism, travel agencies and the entertainment segment most severely affected. Service value added is estimated to have contracted by 12.5% in 2020, with a modest 2.5% forecast in 2021. The hotel and catering segment recorded an estimated 45% contraction last year.

Due to comprehensive government measures meant to support the economy, an increase in payment delays and insolvencies has not yet materialised. However, insolvencies are expected to increase sharply after the abatement or expiry of the aforementioned fiscal measures. While the EU-UK Free Trade Agreement provides for tariff-free bilateral trade in goods, little has been arranged for services.

Steel

Remains Bleak Following a subdued performance in 2019, the pandemic has had a massive effect on the sector´s supply chain and individual businesses´ ability to trade. As this industry is highly reliant on working capital financing, the downturn in trade has exacerbated underlying liquidity and cash flow problems of individual businesses. Steel value added is forecast to rebound by just 1.5% in 2021 after a 14% contraction in 2020. Due to comprehensive government measures meant to support the economy, an increase in payment delays and insolvencies has not yet materialised. However, insolvencies are expected to increase after the abatement or expiry of the previously mentioned fiscal measures.

Textiles

Remains Bleak Producers, wholesalers and retailers already suffered before the coronavirus outbreak from fierce competition and thin margins. Brick-and-mortar fashion retailers are especially severely affected by rising online sales, and many larger businesses went insolvent in 2019. Deteriorating sales due to the lockdowns have exacerbated the market crisis. Clothing value added is forecast to rebound by just 8.5.% in 2021 after an estimated whopping 32% contraction in 2020. It is expected that insolvencies of stationary retailers will increase after the abatement or expiry of fiscal measures intended to support businesses.

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