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  July 25th, 2016 | Written by

UK Facing Problems Over Brexit As European Economy Improves

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  • In Europe, household consumption is boosting the automotive, construction, technology, and metals sectors.
  • Coface: The UK's industrial health hinges on post-Brexit decisions.
  • Strong regional disparities persist in the global economy: five out of Coface's six downgrades are in emerging markets.

The uptick in household consumption reflects restored confidence among households and companies in Western Europe. This positive dynamic has led the information and communication technology (ICT) and automotive sectors to be reclassified as low risk in western, central, and eastern Europe in the latest quarterly review from Coface, the global trade credit insurer.

The rise in new vehicle registrations has benefited both auto manufacturers and companies in the metals sector. Although metals are still associated with high risk, the assessment for this sector has been upgraded since the automotive industry accounts for 12 percent of the sector and construction for 50 percent.

The moderate improvement at the beginning of the year in construction has been confirmed. This situation, along with the rise in building permits in Spain (35 percent), Germany (12.5 percent), and France (7.6 percent), has led to the sector to be reclassified as average risk.

Despite the positive trend in household spending, the textile sector has been plagued by intensified internal competition, particularly in the industry’s mid-range segment.

Although the European economy is gaining momentum, three sectors are under surveillance in the UK following the anticipated split with the European Union. In the short term, construction (6.1 percent of GDP) will be hampered by rising import prices due to the depreciation of the pound sterling. The pharmaceutical and automotive sectors may be negatively impacted by entry barriers, as goods from these industries are among the most heavily exported (7.8 percent and 11.3 percent of exports, respectively.)

A shift between emerging and developed markets

Latin America is still associated with the highest risk in the world, with its energy, steel, and construction sectors all classified in the maximum risk category. On the positive side, Brazil, like many other Latin American countries, is seeing the manufacture of paper pulp enhanced by the fall of the real against dollar in 2015. During the first five months of 2016, Brazilian exports surged by 10 percent, reducing risks in the paper-wood sector, which has been reclassified as average risk.

Among the 12 sectors analyzed by Coface, pharmaceuticals remains the least risky globally. Despite the challenging international environment, the sector is benefiting from increasing healthcare demand in emerging economies and a business model based on reimbursement in advanced economies.

Given the high level of profitability observed in North America, Coface reclassified pharmaceuticals there as very low risk. However, U.S. growth is losing momentum in 2016—forecast at 1.8 percent—and retail sales are slowing, reflecting more muted consumption. North America’s textile sector, which has been impacted by this slowdown, has been downgraded to high risk.

Oil dependent regions bucking the global trend

Even though stronger economic trends can be seen overall, some regions have highly distressed sectors.

The Middle East, which is mainly dependent on oil exports, has adopted austerity policies that are detrimental to other sectors. These measures are hindering economic activities that rely on robust household consumption. The developments are the result of lower oil prices, which have led to a decrease in fuel subsidies. Automotive, food, retail, and textile have all been downgraded to high risk as a result.

Policies imposing cuts in public expenditure have also impacted countries in emerging Asia. This is particularly so in the construction sector, where company debt has reached record levels due to customer late payments. The sector has therefore been downgraded to very high risk. However, the food industry is faring better and expanding due to a slight rally in agricultural commodity prices.