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Country Insight SnapshotUnited KingdomMarch 2017

Written 03 March 2017

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Country Insight Snapshot: United KingdomMarch 2017

2© Dun & Bradstreet

OVERVIEW

O V E R A L L C O U N T R Y R I S K R A T I N G : D B 2 dLow risk: Low degree of uncertainty associated with expected returns. However,country-wide factors may result in higher volatility of returns in future.

Rating Outlook: Deteriorating

CORE OUTLOOK

+ The UK's long-term economic potential exceeds that of most other European economies.

+ The UK is a stable democracy, and a well-entrenched rule of law guarantees the securityof contracts, liberalised markets, and a relatively strict competition policy regime.

- Uncertainty stemming from the Brexit referendum is clouding the country's medium- tolong-term outlook.

- Infrastructure for land transport is congested and unreliable by European standards.

KEY DEVELOPMENT

While the government intends to invoke Article 50 in March, high frequency indicators are stillholding up well, although deteriorating slowly.

CREDIT ENVIRONMENT OUTLOOK

Trend: Stable

Key Development has had a neutral impact on the outlook.

SUPPLY ENVIRONMENT OUTLOOK

Trend: Deteriorating

Key Development has had a neutral impact on the outlook.

MARKET ENVIRONMENT OUTLOOK


Key Development has had a deteriorating impact on the outlook.

POLITICAL ENVIRONMENT OUTLOOK


Key Development has had a deteriorating impact on the outlook.



KEY INDICATORS

Rating History and Comparison

Source : Dun & Bradstreet

Note: 1 = Low Risk, 7 = High Risk

Regional Comparisons

Source : Haver Analytics/Dun & Bradstreet

Economic Sentiment Indicator

Source : National Statistical Offices / Haver Analytics



Economic IndicatorsIndicator 2014 2015 2016e 2017f 2018f 2019f 2020f 2021f

C/A balance % GDP -4.7 -4.3 -5.3 -4.5 -4.2 -4.4 -4.3 -4.1

Govt balance, % GDP -5.8 -4.4 -4.3 -4.5 -4.4 -4.0 -3.7 -3.4

Inflation, annual avge % 1.5 0.0 0.7 2.6 2.7 2.5 2.3 2.0

Real GDP Growth, % 3.1 2.2 1.8 1.5 1.5 1.6 1.7 1.8

Unemployment, % 6.1 5.3 4.8 5.0 5.1 5.2 5.0 5.1Source : Haver Analytics/Dun & Bradstreet

TRADE AND COMMERCIAL ENVIRONMENT

According to the Global Competitiveness Report 2016-17, published by the World EconomicForum, the UK is the world's seventh most competitive economy (out of 138 countries surveyed).Compared with the 2015-16 edition, the ranking is up by three positions. The UK scoresparticularly well in the technological readiness sub-index (3rd), as well as in labour marketefficiency (5th) and business sophistication (7th). Weaknesses are to be found in the fields of healthand primary education (17th), higher education and training (20th) and - particularly - in themacroeconomic environment (85th, although this is up from 108th in the previous report).According to survey respondents, the biggest obstacles for doing business in the UK are taxregulations, inadequate provision of infrastructure, and tax rates. However, with the survey havingbeen completed before the Brexit vote, Dun & Bradstreet expects uncertainty about the UK'srelations with the EU to become the most pressing issue.

TRADE TERMS AND TRANSFER SITUATION

Minimum Terms: OAThe minimum form of documentation or trading method that Dun & Bradstreet advises itscustomers to consider when pursuing export trade with the stated country.Recommended Terms: OADun & Bradstreet's recommended means of payment. The use of recommended terms, which aregenerally more stringent than minimum terms, is appropriate when a customer's paymentperformance cannot be easily assessed or when an exporter may wish to limit the risk associatedwith a transaction made on minimum terms.Usual Terms: 30-60 daysNormal period of credit associated with transactions with companies in the stated country.

Local Delays: 0-1 monthThe time taken beyond agreed terms for a customer to deposit money in their local bank as paymentfor imports.FX/Bank Delays: 0-1 monthThe average time between the placement of payment by the importer in the local banking systemand the receipt of funds by the exporter. Such delays may be dependent on FX controls, FXavailability and the efficiency of the local banking system.



Exchange Rate

Source : International Monetary Fund/Dun & Bradstreet

LCU (local currency unit) = British pound

Credit Conditions

Source : Export Credit Agencies

Insured export credit exposures, USDm



RISKS AND OPPORTUNITIES

Short-Term Economic Outlook

Forward looking indicators are easing

With the self-imposed 31 March deadline for the invocation of Article 50 (the legal base forBritain's departure from the EU) quickly approaching, the country's short-term economic outlook isstill sound in a European comparison basis, but also deteriorating if compared with past quarters.As households are starting to feel the sharp rise of the inflation rate (which has come in at 1.8% inJanuary, the highest reading since June 2014), retail sales are responding negatively. Latest availabledata for January from the Office for National Statistics shows that sales volumes were down 0.2%q/q, on top of the fall seen in December. With real wages only up by 1.4% y/y in Q4 2016 (thelowest expansion rate in three years), headwinds in the retail sector are increasing.

Meanwhile, optimism in the services sector is also fading (albeit slowly): the latest PurchasingManagers' Index (PMI, compiled by Markit) came in at 54.5 points in January. Although this is stillcomfortably above the neutral 50-points line that divides expansion in sectoral activity fromcontraction, it has fallen against the prior month for the first time since September. Worryingly,output is now only rising marginally and input price inflation is at its highest level since March2011, indicating further price pressures in the months ahead. We expect inflation to breach thecentral bank's 2.0% target in the next months, caused by the ongoing weakness of the pound andrising prices for commodities on global markets.

Political/Insecurity Risk

By-elections strengthen the government

In the political field, two by-elections on 23 February strengthened the position of Prime MinisterTheresa May as her Conservative Party won the Copeland constituency, a notorious Labour Partystronghold. Labour could eventually defend the Stoke constituency against the UK IndependenceParty (UKIP) but the Conservatives have opened up a comfortable lead in national polls, also helpedby the unpopularity of the Labour and UKIP party leaders. This has put May in a comfortableposition as, in the unlikely case her largely pro-EU parliamentary group opposes her hard Brexitstance, snap elections could become an option. That said, our core scenario is that the parliamentaryterm will end as scheduled in 2020, one year after Brexit is completed.

Business Continuity

Work on new high speed train line about to start

After having finally received royal ascent, work on the controversial High Speed 2 (HS2) train linebetween London and Birmingham is about to start in April. The GBP22bn project will slash thetravel time from 81 minutes to 49 minutes, and increase the number of rush-hour seats from 11,000to about 30,000, thereby providing a better connection between the country's two biggest cities.Despite ongoing vocal opposition from environmentalists and railway experts that consider theproject as unprofitable, Dun & Bradstreet expects the first stage of the project to be completed by2026 with extensions to other cities such as Manchester, Leeds and Sheffield to be built by 2033.



COUNTRY PROFILE AND STATISTICS

Overview

The UK lies off the northwest of the European mainland and consists of four countries (England,Wales, Scotland and Northern Ireland, the last of which shares a separate island with the Republicof Ireland). As an EU member since 1973, the UK played an important role in shaping theinstitution, but remained reluctant to cede sovereignty in areas that it saw as strategic, even beforethe June 2016 'Brexit' vote.

Given its imperial past, the UK is a key actor in international politics, while cultural, historical andideological links make it a natural ally of the US. The UK is a modern, well-established democracy.Two main parties (Conservative and Labour) dominate the political scene, with national partiesfrom Scotland and Wales, as well as the Liberal Democrats and the UK Independence Party,acting as secondary forces.

The economy, dominated by the services sector, is highly developed, liberalised and globallyintegrated. Financial services companies concentrated in London, one of the foremost globalfinancial centres, have long been a strong driver of economic growth, helping the UK to outperformmost other G7 economies in the ten years to 2007. However, the 2008 international financial crisisturned the reliance on banking and related services into a vulnerability, now emphasised by thelooming British departure from the EU.

Key FactsKey Fact Detail

Head of government Prime Minister Theresa MAY

Capital London

Timezone GMT

Official language English

Population (millions) 65.1

GDP (USD billions) 2,619.6

GDP per capita (USD) 40,233

Life expectancy (years) 81

Literacy (% of adult pop.) 99.9

Surface area (sq km) 243,610Source : Various sources/Dun & Bradstreet

Historical DataMetric 2012 2013 2014 2015 2016e

Real GDP growth (%) 1.3 1.9 3.1 2.2 1.8

Nominal GDP in USDbn 2,646 2,720 2,999 2,861 2,620

Nominal GDP in local currency (bn) 1,675 1,740 1,822 1,873 1,940

GDP per Capita in USD 41,621 42,522 46,615 44,210 40,233

Population (year-end, m) 63.6 64.0 64.3 64.7 65.1

Exchange rate (yr avge, USD-LCU) 0.63 0.64 0.61 0.65 0.74

Current Account in USDbn -97.1 -119.9 -139.7 -122.5 -139.1

Current Account (% of GDP) -3.7 -4.4 -4.7 -4.3 -5.3

FX reserves (year-end, USDbn) 88.6 92.4 95.7 119.0 123.5

Import Cover (months) 1.3 1.3 1.3 1.7 1.7

Inflation (annual avge, %) 2.8 2.6 1.5 0.0 0.7

Govt Balance (% GDP) -8.3 -5.7 -5.8 -4.4 -4.3Source : Haver Analytics/Dun & Bradstreet



ForecastsMetric 2017f 2018f 2019f 2020f 2021f

Real GDP growth (%) 1.5 1.5 1.6 1.7 1.8

Nominal GDP in USDbn 2,513 2,661 2,820 2,978 3,136

Nominal GDP in local currency (bn) 2,020 2,105 2,191 2,278 2,365

GDP per Capita in USD 38,359 40,371 42,534 44,641 46,745

Population (year-end, m) 65.5 65.9 66.3 66.7 67.1

Exchange rate (yr avge, USD-LCU) 0.8 0.79 0.78 0.77 0.75

Current Account in USDbn -112.0 -112.8 -123.8 -128.1 -127.9

Current Account (% of GDP) -4.5 -4.2 -4.4 -4.3 -4.1

FX reserves (year-end, USDbn) 126.0 128.5 131.1 133.7 136.4

Import Cover (months) 1.8 1.8 1.7 1.7 1.7

Inflation (annual avge, %) 2.6 2.7 2.5 2.3 2.0

Govt Balance (% GDP) -4.5 -4.4 -4.0 -3.7 -3.4Source : Haver Analytics/Dun & Bradstreet

Comparative Market IndicatorsIndicator UK Germany US France Japan

Income per Capita (USD) 44,210 41,666 55,326 37,580 34,526

Country Population (m) 64.7 80.7 321.8 64.4 127

Internet users (% of population) 92 87.6 74.5 84.7 93.3

Real GDP Growth (% p.a., 2017 - 2026) 1.8 - 3.5 1.8 - 3 1.8 - 2.5 1.3 - 2.5 -0.5 - 1.2Source : Various sources/Dun & Bradstreet



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