The UK economy has faced multiple challenges over the past two years, including high inflation, restrictive financial conditions, tight fiscal policy and declining goods export competitiveness, prompting uncertainty in the private sector. However, have the recent actions taken by Chancellor Rachel Reeves helped matters? That remains highly questionable according to one insurer’s new report.
The second Country Risk Atlas report from Allianz Trade is based on a proprietary risk matings model updated quarterly with economic developments and Allianz Trade’s data. It provides analysis on economic, political, business environment and sustainability factors that influence non-payment risk trends at a macroeconomic level.
According to the report, policy announcements in 2024 contributed to uncertainty in the UK’s private sector, particularly planned tax increases.
Although inflation has fallen from previous peaks, it remains above the Bank of England’s (BoE) 2% target, requiring a more restrictive stance compared to other central banks. However, the BoE is expected to lower the Bank Rate by 25 basis points on February 6 and continue reducing rates periodically until the third quarter of 2025 in response to weak economic activity and persistent inflation.
While domestic conditions may improve, external risks remain. Planned US tariff increases could affect UK exports, particularly in automotive, chemicals and machinery. Higher National Insurance contributions could also weigh on labour supply, wages and employer costs, limiting potential growth benefits from investment policies.
The UK economy also remains sensitive to exchange rate fluctuations, with around half of import prices influenced by currency movements. In contrast, the impact of a weaker currency on exports is limited due to a lower passthrough effect.
That said, investment policy under the current government is expected to be more supportive, particularly in homebuilding and the NHS. The overall policy stance is likely to remain business-friendly, with efforts to encourage domestic and foreign investment, according to the report.
Looking ahead, Allianz Trade said several factors, including geopolitical tensions, trade war risks and civil unrest and polarisation, could disrupt positive momentum for the next couple of years.
“A full-blown trade war is a major concern: the resulting loss of economic activity and the return of inflationary pressures would likely undermine investor confidence, keeping them in a prolonged ‘wait and see’ mode,” said Ana Boata, head of economic research at Allianz Trade. “At the same time, increasing polarisation, already evident in many countries, imposes significant economic costs while intensifying social divisions.”
“The frequency and severity of civil unrest are also rising, driven by factors such as inflation, fiscal adjustments and lagging productivity growth,” Boata added. “Against this backdrop, policymakers need to bridge the widening trust deficit and mitigate polarisation risks.”
