UK Businesses face ongoing economic pressure –

Allianz Risk Barometer

Mirroring the global picture, cyber is the top risk in the UK, followed by the closely linked risk of business interruption, and one of this year’s biggest risers, natural catastrophes. A reflection of the ongoing tight labour market, a shortage of skilled workers climbed one place since last year to fourth, while growing concern about climate change and political risk sees these rise to joint fifth.

The findings highlight the ongoing vulnerability of companies in a shifting and unpredictable landscape. At the start of 2024, companies large and small face a host of challenging risks, from ransomware attacks and extreme weather, to rapid advancements in technology like artificial intelligence. These risks are hitting home, straining supply chains and businesses at a time of heightened geopolitical and macroeconomic uncertainty.

The Allianz Risk Barometer also shines a light on the growing threat of supply chain disruption to UK businesses, a risk brought into sharp focus by recent attacks on shipping in the Red Sea. The prominence of business interruption – ranked second by both global and UK respondents - reflects the volatile environment that companies currently operate in, and the vulnerability of their supply chains to natural hazards, geopolitical and macroeconomic developments.

Compared with pre-pandemic times, many companies are now much better prepared for business interruption or supply chain events. According to the Allianz Risk Barometer results, businesses are most likely to develop alternative suppliers (60% of responses) when taking action to de-risk supply chains, followed by improving business continuity management (42%) and identifying and remediating supply chain bottlenecks (37%).

However, smaller companies and those in specialist and high value industries are more limited in what they can do to diversify their supply chains. In addition, loss events like a ransomware incident or a flood tend to be more impactful for mid-size and smaller companies, which are much less likely to have mitigating measures in place and can easily end up paralyzed or even out of business. In fact, the resilience gap between large and smaller companies is widening, as bigger firms take lessons from the pandemic and build their wider business resilience.

In what is a crowded field for business concerns this year, macroeconomic developments remain a top five risk globally in the Allianz Risk Barometer 2024, and ranks seventh in the UK. Yet economic growth is forecast to weaken to just over 2% globally in 2024, and undershoot the long-term average significantly, according to Allianz’s research. We forecast 2024 GDP growth at +0.6% in the UK, compared with +1.4% in the US and +0.8% in the Eurozone.

Heightened geopolitical risk will only add to economic uncertainty in 2024, as countries that account for 60% of global GDP head to the polls, including in India, Russia, the US, and the UK. Unsurprisingly, given ongoing conflicts in the Middle East and Ukraine, UK respondents to the Allianz Risk Barometer rank political risks joint fifth alongside climate change, which jumped three places since 2023.

2024 could become a year of transition, in which the wild ups and downs of growth, inflation and interest rates experienced since the Covid-19 shock settle down and pivot to more usual levels. Yet, with the large number of elections this year and their potential for upheavals, this outcome is far from certain, according to Ludovic Subran, Chief Economist at Allianz.

“First and foremost, of course, is the US election – which could end with a possible return of Donald Trump to the White House. Trump II is likely to be more disruptive than Trump I, for one simple reason: eight years later, the world is a different place, fragmented and torn apart by a multitude of conflicts and wars. An isolationist America is always bad news for the rest of the world (at least for the free one), but in times like these the risks are even greater than usual,” he says.

Thanks to softening demand and positive base effects on energy and food, we expect headline and core inflation should approach central bank targets by the summer in major economic regions, although the UK is notable as being a relative laggard. Allianz forecasts UK inflation will fall from around 7% in 2023 to 3.8% this year, and 2.6% in 2025.

However, the knock-on effects of the war in Gaza creates a degree of uncertainty for inflation and therefore the timing of potential future interest rate cuts. The Houthi attacks against commercial shipping in the Red Sea, which accounts for one-third of worldwide container traffic and 40% of Asia-Europe trade, are leading to costlier and time-consuming rerouting around Africa. If the crisis persists, a doubling of shipping prices would push global inflation up by +0.5pp, resulting in a -0.4pp reduction in GDP growth, according to Allianz Trade analysis. And with 12% of seaborne oil and 8% of liquefied natural gas passing through the Suez Canal, energy prices in Europe will remain volatile.

Assuming inflation continues to fall, we anticipate that central banks will pivot earlier than expected by economic forecasters (i.e. summer 2024) but later than market expectations as it takes time to cool down a hot labour market. By end-2024, we expect policy rates to stand at 4.5% in the UK, compared with 4.5% in the US and 3.5% in the Eurozone.

The increased cost of borrowing has raised concerns about higher default rates among businesses, and with only 60% of the rise in interest rates passed through in most European countries, the full hit is still looming. So far, corporates have managed to navigate the higher yield environment quite successfully, although the same cannot be said for smaller firms and those in more highly leveraged sectors.

UK business insolvencies are forecast to grow +5% in 2024, and will be 35% higher this year than in 2019, according to Allianz analysis. The vast majority (98%) of insolvencies in Q3 2023 affected businesses with revenue under £1m. Although, with nearly 30 businesses with revenues over £25m entering an insolvency process, it shows that even larger businesses are not safe from the current tough conditions.

With many companies dependent on a small number of critical suppliers and customers, unexpected events like a cyber attack, fire, or major insolvency affecting the value chain can have a domino effect, whereby a single business failure can set off a series of business failures. If we add today’s heightened levels of geopolitical and economic uncertainty to the mix, the ability of many businesses to withstand shock events will be severely tested in 2024.

In such an unpredictable environment it’s wise to protect your business with a trade credit insurance policy. Trade credit insurance enables you to offer B2B credit terms with confidence by insuring your trade receivables due within 12 months. So, if a customer fails to pay, whether it’s due to insolvency, refusal or an inability to pay under the terms of the contract, a policy indemnifies your losses.

Trade credit insurance also gives companies the confidence to grow in an uncertain economic and geopolitical environment. Whilst it reimburses losses occurred, trade credit insurance also informs credit risk decisions through powerful insight on who to extend credit to and what limits to offer. This means you can avoid offering credit terms to customers with a higher risk of non-payment.

To find out more about market-leading trade credit insurance from Allianz Trade, contact our specialist team for a free consultation on 0800 056 5452.