Atlas reveals elevated trade risk for key UK sectors

Many sectors in the UK are showing elevated levels of non-payment risk, with construction, automotive and paper rated as high risk, according to Allianz Trade research.

UK companies face a higher risk of default in 14 out of 18 sectors, according to the Allianz Sector Atlas 2024. The country has three sectors with a ‘high risk’ rating (considered imminent or recognised crisis), and a further 11 with a ‘sensitive’ rating (viewed as having structural weaknesses and/or an unfavourable outlook), according to the Sector Atlas, which analyses non-payment risk for key sectors across 70 countries.

At global level, most sector ratings, 87 percent, fall into the ‘medium’ or ‘sensitive’ risk categories. This compares to 78 percent for the UK, with Automotive Suppliers, Construction and Paper all deemed ‘high’ risk.

The Atlas ratings asses the risk of corporate default per sector, in each country. In the UK, Automotive Suppliers, Construction and Paper are deemed high risk, while globally, Construction, Textiles and Metal sectors come out worst. Pharmaceuticals (the only sector with a positive rating in the UK) and Software & IT Services tend to have stronger ratings globally.

Despite a recovery in ratings over the past year, the picture is still worse than in the pre-Covid period for almost all sectors. The global manufacturing sector is struggling with excess supply and sluggish demand, especially in the Eurozone. Global growth bottomed out in H1, and we forecast global GDP growth at +2.8% in 2024 and 2025. In the UK, we expect UK GDP to grow by +1.3% this year as financial conditions should continue to ease, followed by +1.9% in 2025.

Sectors now fall into three main camps: Those facing weaker demand and lower pricing power (paper, chemicals, agrifood, retail, textiles and household equipment); sectors facing supply chain and geopolitical challenges (transportation and energy); and industries with stable or improving outlook, which tend to benefit from technological advances (pharma, automotive, IT services).

Construction and auto suppliers – two important sectors for the UK economy – currently present high risk of default:

• Construction: Fuelled by high interest rates, rising material and labour costs, the sector has had a challenging few years, resulting in a surge in business insolvencies. Many firms are still struggling with loss-making contracts and liquidity issues, risking failure as more attempt to overtrade, impacting the wider sector. On a positive note, inflation and interest rates are normalising, and the UK government has pledged to build new homes, energy and digital infrastructure. 
• Auto suppliers: The automotive sector is having a tough time navigating the EV transition amid slowing demand and higher costs. Suppliers are under increased pressure from longer billing cycles and further squeezed margins, and some small suppliers are being forced out, while large suppliers have needed to cut costs. There have been recent model changeovers, and we still hear of supply chain constraints that have restricted output. The market is likely to see a continued degree of volatility given the transition to zero-emission vehicle. 

Energy and digital technology - two sectors identified by the new Labour government as potential sources of growth – are also rated as higher risk in the UK than on average.  

• Energy (medium risk globally, sensitive in the UK): Among the positives for the sector is the strong push for energy transition, with enhanced policy support to renewables through various instruments. However, the sector remains exposed to geopolitical risk, while electric grid infrastructure in many economies remains weak, including in the UK.
• IT Services (low risk globally, medium risk in the UK): The digitalisation of the economy and investments in AI are a strong long-term driver for technology sectors: IT spend in the UK is expected to reach close to £60,000 per employee. Low barriers to entry, availability of skilled labour and data privacy regulation being key weaknesses for the sector.

With the Bank of England lowering the bank rate by 25bps to 5% in August, a slow loosening cycle is now underway: We expect a further 25bps cut in November, with further cuts in 2025, stopping in September 2025 once the rate reaches 3.25%.

While the economic outlook is improving, the Sector Atlas shows that many businesses continue to face the heightened risk of non-payment. UK insolvency rates were 16% higher in July 2024 than the same month in the previous year, while the number of company insolvencies remained much higher than pre-Covid. UK insolvencies to end the year 43% above 2019 levels, the highest in Europe alongside Ireland.