Counting the cost of new import controls

Summary

Key Takeaways

Post-Brexit border controls add costs for UK businesses amid economic challenges like payment delays and financing constraints.
New controls on EU agricultural imports could cost UK importers £2bn, potentially raising inflation by +0.15pp.
Despite tariff-suspension measures, uncertainty around wages and trade disruptions remain concerns for the Bank of England.
Rising corporate financing constraints and impending EU Late Payment regulations may worsen cash-flow issues, emphasizing the need for trade credit insurance to preserve working capital.

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Post-Brexit border controls will add further costs for UK businesses already battling sluggish economic growth, payment delays and financing constraints.

More than four years after Brexit, and delayed five times, new border controls on agricultural imports from the EU will finally be implemented at the end of this month. From April 30, agricultural imports worth £21bn – representing close to 8% of imports coming from the EU and 3% of all UK imports – will be subject to physical checks, health certificates and identification before entering the UK. The measures could cost UK importers £2bn and potentially push up inflation by +0.15pp.

New controls on EU imports, however, will be largely offset by aggressive tariff-suspension measures. As of April 11, the UK government implemented a two-year tariff suspension on a wide range of goods, including cars, metals, fuels, and precious stones. Tariffs on the goods, which represent more than 45% of total UK imports worth £300bn, fell from a 3.2% trade-weighted average tariff to zero overnight. On balance, we expect UK inflation to land at 2.4% in 2024, and 2.0% in 2025, down from our inflation forecast prior to these changes at 2.6% in 2024 and 2.2% in 2025.

With the UK economy bottoming-out and inflation falling, the Bank of England (BoE) is now likely to pivot in August. However, the BoE will remain cautious before cutting interest rates given uncertainty around wages (the minimum wage will again rise by 9.8% in April 2024, which could boost inflation by between 0.2pp and 0.3pp), as well as the potential inflationary impact from trade disruptions in the Red Sea and the implementation of new border controls on EU imports.

Record corporate financing constraints

The implementation of new border controls comes just as UK businesses contend with payment delays and financing constraints. Driven by softer economic growth and higher operating and financing costs, global Working Capital Requirements (WCR) increased for the third consecutive year in 2023, reaching the highest level since 2008 (+2 days to 76 days). All regions saw an increase in WCR while over a third (34%) of companies globally recorded WCR exceeding 90 days of turnover as of Q4 2023.

The key driver for the rise in WCR was an increase in Days Sales Outstanding (DSO) – which measures the average number of days it takes for a company to collect cash from credit purchases. Global DSO increased by +3 days in 2023 to reach 59 days, the highest increase since 2008, and almost double that of 2022. Almost all sectors have been hit by longer payment terms: 1 in every 5 corporates paid their suppliers after 90 days in 2023. As a result, more companies are likely to wait longer to get paid, raising the risk of cash-flow issues.

Payment delays look set to worsen this year as European corporates face a looming profitability squeeze: Our data shows that a -1pp drop in profitability increases payment terms by over seven days. As we wrote in our recent Global Insolvency Report, 2024 will be a year of reality checks for companies. Weaker-for-longer demand is likely to result in increased competition, leading to reduced pricing power and declines in revenue growth, increasing the pressure on profitability at a time of still-high operating costs, with little relief from energy prices and labour costs.

In addition, proposed EU Late Payment regulation – which could see payment terms reduced from the current recommended 60 days to 30 days – is likely to have a significant macroeconomic impact given that more than 40% of European companies were paying after more than 60 days as of Q4 2023. We estimate that the initial proposal would give rise to almost EUR2trn in demand for additional financing, which at current interest rates would mean an extra financing cost of up to EUR100bn in interest expenses per year for European companies alone.

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Sub-par growth and record insolvency

Weak demand looks set to stay for the remainder of this year with global GDP growing by less than +3% between 2024 and 2025. Economic growth is slowing in 84 economies, including US, Canada, France, and Spain, while in the UK it is expected to be just +0.4% in 2024. The recession in global trade is ending, but the recovery will be limited by a glut in inventory, while financing costs are expected to remain restrictive until year-end. The pick-up in core inflation in Europe and the US over the past couple of months has also reignited concerns, while significant downside risks loom from the uncertain political landscape, with close to 60% of global GDP going to the polls this year.

Corporate profitability will also be tested as pricing power wanes. Some 40%-50% of global corporate debt is due by 2026, although expected lower interest rates should make the debt-repayment wall manageable. But highly-leveraged sectors could be increasingly distressed, keeping business insolvencies at high levels. Globally, insolvency rates are expected to increase further in 2024 (+9% after +7% in 2024), while insolvency rates in the UK are set to peak at a 15-year record, with around 31,000 UK businesses expected to fail in 2024, a 10% increase on last year.

Protecting cash flow and working capital

Trade credit insurance protects your business from insolvency or protracted default by, amongst other things, checking customer creditworthiness, dealing with late payments or liquidations and handling claims and collections. By protecting against non-payment, trade credit insurance can also preserve cash flow and optimise working capital, as well as help secure improved financing terms.

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, or get a free online quote today.