UK Quarterly Industry Report Quarter 2 2019

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CONTENTS

1.0 UK Economic Outlook: With the new prime minister being more open to a no-deal Brexit, Dun & Bradstreet downgrades the political environment outlook to ‘deteriorating’.

2.0 Global Economic Outlook: Headwinds are undermining global growth.

3.0 Payment Snapshot: Payments performance continues to improve.

4.0 Corporate Liquidations: The number of corporate liquidations remains fairly stable in Q2 2019.

5.0 Risk of Failure and Payment Delinquency: Industry sector comparison

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GLOSSARY OF TERMS

Dun & Bradstreet defines specific terms as follows:

Business failure - A ‘Failed Business’ means any business that seeks legal relief from its creditors or ceases operations without paying all its creditors in full.

Company* - A legal entity, made up of an association of people (be they natural, legal, or a mixture of both), for carrying on a commercial or industrial enterprise.

Corporations - A ‘Corporation’ is a company or group of people authorised to act as a single entity (legally a person) and recognised as such in law.

Non-registered business - A business that is not recognised as a separate legal entity and not registered at that country’s official companies registry (e.g. Companies House in the UK).

Firm - A business organisation that sells goods or services to make a profit, regardless of registration status.

Prompt Payment Data – this is based on analysis of available payment performance information provided voluntarily to Dun & Bradstreet by a limited number of companies and does not reflect all payment behaviour.

*Companies included in this report are those registered at Companies House.

A B O U T D U N & B R A DS T R EE T

Dun & Bradstreet grows the most valuable relationships in business. By uncovering truth and meaning from data, we connect our customers with the prospects, suppliers, clients and partners that matter most, and have since 1841. Nearly ninety percent of the Fortune 500, and companies of every size around the world, rely on our data, insights and analytics. For more about Dun & Bradstreet, visit DNB.co.uk. Twitter: @dunandbradstreet

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1.0 U K ECO N O M I C O U T LO O K

P O L I T I C A L E N V I R O N M E N T O U T L O O K D O W N G R A D E D

On 24 July, Boris Johnson succeeded Theresa May as British prime minister. Almost immediately, Johnson reshuffled the cabinet, filling senior positions with supporters of a tougher Brexit stance. While Johnson campaigned in the 2016 referendum for Britain to leave the EU (unlike May), and although he has re-iterated that Brexit will happen on 31 October, it remains to be seen how this will actually unfold over the coming weeks and months. The leadership change and the cabinet reshuffle have certainly increased the risk of a ‘no-deal’ Brexit (we have consequently downgraded the political environment outlook from ‘stable’ to ‘deteriorating’), but Johnson is unlikely to command a parliamentary majority for such an attempt. Over the past quarters, parliament has repeatedly voted against a no-deal Brexit, and it seems more likely that Johnson would face a vote of no-confidence rather than be able to secure a majority for an unmanaged exit from the EU.

Should Johnson’s attempt to re-negotiate May’s Brexit deal with the EU be unsuccessful (which seems likely) and parliament stop a no-deal Brexit, early elections are the most realistic scenario. Unfortunately, polls are inconclusive, and it is possible that no party would secure an outright parliamentary majority, further exacerbating the already high degree of political uncertainty. For the time being we are maintaining our risk rating of DB2d, but we would downgrade it (and adjust our macroeconomic forecasts) were the likelihood of a no-deal Brexit to increase further: a no-deal departure would have significant adverse impacts in the British economy and would reduce the returns of doing business with the country, at least over the short to medium term.

R E TA I L S E C TO R CO N T I N U E S TO S T R U G G L E

In addition to the unclear political situation, the economy continues to send conflicting messages. Worryingly, latest retail sector data points towards a challenging operating environment. According to the Confederation of British Industry, retail sales contracted in July, the third month of contraction, making this the longest decline since 2011.

The muted level of household demand is somewhat surprising, as labour market conditions remain sound. Employment stands at record high levels, unemployment is ultra low, and wage growth is solid. The latest figures from the Office for National Statistics show that wages expanded by 3.6% y/y in the three months to May, the fastest growth rate since 2008. When inflation is taken into account (currently it is around 2.0%), the growth rate was the fastest in three years. However, without a solution to the ongoing Brexit crisis, households are likely to remain cautious, especially when purchasing big ticket items (car registrations were down in 2017, 2018 and Jan-May 2019). Dun & Bradstreet expects real GDP to grow by 1.3% this year and 1.4% in 2020, assuming a no-deal Brexit is avoided – should this not be the case, the UK would almost certainly enter a recession, as global demand is also switching into a lower gear.

I N F L AT I O N

I N F L AT I O N , E M P L O Y M E N T & G D PAV E R A G E W E E K LY E A R N I N G S

G R O W T H A N D I N F L AT I O N

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Global growth remains subdued in the face of economic, political and security headwinds. We are currently forecasting global real GDP growth of 2.5% in 2019, down from 2.9% in 2018 and below the average of 2.9% since the 2008/09 recession; regionally, only Sub-Saharan Africa and the Middle East and North Africa are forecast to perform better in 2019 than in 2018. Among the headwinds is the build-up of corporate, household and sovereign debt driven by years of low interest rates, alongside deflationary pressures that reflect weak demand growth. High leverage and already low policy rates are curtailing the ability of advanced country central banks to use monetary policy to offset slowing economic growth, and the string of emerging market central bank rate cuts since January is unlikely to drive emerging market economic growth back over 4.0% in 2019.

Meanwhile, two political challenges gained in potential impact towards the end of July. The election of Boris Johnson as British prime minister has increased the level of uncertainty around Brexit, with the possibility of a no-deal departure from the EU rising sharply. A no-deal exit would significantly increase risks and costs for undertaking cross-border business with the UK, including the world’s premier financial hub in London. The second risk is associated with the elevated tensions in the Persian Gulf, which could result in military action. With 35% of seaborne crude oil passing through the Gulf, tensions are supporting oil prices. Any large-scale, overt military strikes in the region would inevitably raise the global oil price, hitting energy-intensive sectors such as manufacturing, where supply chains are already under pressure to adapt from existing (and potential) trade wars.

K E Y R I S K : G L O B A L M A N U FAC T U R I N G S T I L L I N A D J U S T M E N T M O D E

We expect the global slowdowns seen in fixed investment and manufacturing to continue into 2020, even as services sectors and job markets remain stable, or mildly expanding. The pattern has been consistent for several quarters, but the drivers of the shock have changed: in 2018 the key factor was disruption to the automotive sector due to emission standards, while 2019’s influences have come from stagnant Chinese demand and from restraints on big investments by households and businesses due to the background uncertainties mentioned above. The contrast was evident in 4.3% q/q (annualised) growth in US private consumption in Q2, against an 8.0% y/y fall in Chinese goods imports in May-June. Likewise, the declines in leading automotive, machinery and electronics firm profits in Q2 contrasted with gains for global consumer and internet brands. The data around oil, copper and semiconductors suggests that the adjustment for global manufacturing has more quarters to run.

2 .0 G LO B A L ECO N O M I C O U T LO O K : H E A DW I N DS U N D ER M I N I N G G LO B A L G R OW T H

Our 2019 price forecast for copper, echoing global manufacturing trends, was lowered in July, further below USD6,300 per tonne, reflecting both weaker demand and sentiment. Meanwhile, the International Energy Agency again cut its forecast for global oil demand growth – for the second month in a row – to 1.1m barrels per day. Given flat domestic oil production, and higher refined exports and inventory building, we believe China’s actual oil demand growth was less than 4.0% y/y in Q1-Q2, while import volumes of copper to China, the largest market, fell by 26.7% y/y in June. We note global semiconductor sales fell almost 15% y/y in May, and semiconductor equipment sales are forecast to fall 18% in 2019. Although there are pockets of strength, as in Spain, parts of central and eastern Europe, and Vietnam, the forecast recovery in global growth from 2020 will require easy, stable global financial conditions and a lack of further operational/supply chain shocks.

K E Y G L O B A L G R O W T H I N D I C AT O R S

R E A L G D P G R O W T H ( % )

2018 2019f 2020f

World 2.9 2.5 2.7

Advanced Economies 2.2 1.7 1.7

US 2.9 2.5 1.9

Euroland 1.9 1.2 1.5

Japan 0.8 0.8 0.4

UK 1.4 1.3 1.5

Emerging Economies 4.1 4.0 4.4

Brazil 1.1 1.0 2.2

Russia 2.3 1.5 1.6

India 6.8 7.0 7.3

China 6.6 6.1 5.8

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3 .0 PAY M EN T S N A P S H OT

The chart above depicts how promptly all UK businesses have been paying their bills over the past nine months (blue line). After a significant rise in Q4 2018, prompt payments improved in the three months to March before another increase occurred in June, according to Dun & Bradstreet’s latest data: 35.8% of payments were made on time in December versus 40.4% in June. This is somewhat surprising, as general macroeconomic conditions are still challenging (putting labour market data aside) and uncertainty about the unresolved Brexit situation is still high. One explanation for the increase of prompt payments in H1 2019 could be because of businesses stockpiling ahead of Brexit; i.e. businesses with strict credit lines would have paid more promptly to allow intake of additional stock to ensure they could meet demand.

P R O M P T PAY M E N T ( C AT E G O R I S E D B Y N U M B E R O F E M P L OY E E S )

As the data in the charts below reflects, larger businesses continue to squeeze their suppliers by paying in a much slower manner than their smaller counterparts. The differential in payment habits between those companies employing 1,000 workers or more and those employing fewer than five is significant: 10.8% in Q2 (it was 5.7% in early 2018) as opposed to some 47.1% (compared with 37.7% in early 2018).

Late payments remain a major problem for UK-based small and medium-sized enterprises (SMEs). While legislation is in place to assist small businesses with their struggle against late payments, most businesses, especially SMEs, elect to take no action for fear of alienating their larger customers. Indeed, according to the Association of Chartered Certified Accountants (ACCA), firms with fewer than 50 employees are typically twice as likely as larger businesses to experience late payment issues. Besides giving rise to tighter financial conditions and higher administrative, transaction and financial costs (external financing may be necessary to manage cash flows), late payments can cause insolvency and ultimately lead to bankruptcy. In mid-July, the Chartered Institute of Credit Management suspended 18 companies from the Prompt Payment Code as these businesses (which included BT, British American Tobacco, Prudential and Centrica) failed to pay 95% of their supplier invoices within 60 days.

AV E R A G E P R O M P T PAY M E N T B Y E M P L O Y E E S I Z E Q 2 2 0 1 9

P R O M P T PAY M E N T B Y E M P L O Y E E B A N D

P R O M P T PAY M E N T B Y I N D U S T R I E S

P R O M P T PAY M E N T S T R E N D L I N E O C T O B E R 2 0 1 8 T O J U LY 2 0 1 9

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P R O M P T PAY M E N T ( C AT E G O R I S E D B Y I N D U S T R Y )

As Dun & Bradstreet data shows, all 14 sectors covered in our Industry Report saw quarter-on-quarter improvements in the share of prompt payments in April-June (similar to the January-March period). The smallest improvement was recorded in machinery manufacturing and transport, where the share of prompt payments rose by 0.9 percentage points (pp). At the top of the league are construction (up by 5.7pp) and materials processing (+2.7pp). Despite the rise of prompt payments in all sectors, significant differences across industries remain clearly visible: while only 27.9% of all bills get paid on time in the machinery manufacturing sector, this percentage rises to 48.1% in the construction sector and an even higher 58.9% in agriculture. Meanwhile, the public sector is no longer bottom of the league (a position now occupied by machinery manufacturing), but with only 28.2% of all bills having been paid on time in Q2 2019, the sector’s performance is still significantly below the national average.

P R O M P T PAY M E N T ( C AT E G O R I S E D B Y R E G I O N )

Dun & Bradstreet’s Q2 data reveals that regional payment patterns have remained fairly stable, with the urban regions of Manchester and London still displaying the lowest share of prompt payments: only 34-36% of all bills are settled on time there, compared with the UK average of around 40%. At the other end of the spectrum are East Anglia (46.4% of all payments are paid promptly) and the South West (46.6%).

Positively, all 14 regions in the UK showed a rising share of prompt payments in Q2 2019. The biggest improvements were recorded in the Channel Islands (+5.1pp) and in the South West Anglia region (+3.0pp). In a European comparison, proprietary data from Dun & Bradstreet and our World Wide Network confirms the UK’s slightly below-average position: in Q1 2019 (the latest available data for this comparison) the average payment delay in the UK was 13.7 days (down from 15.0 days in Q3 2018), compared with a European average of 13.4 days (13.3 days in Q3). The UK lags some of its neighbours considerably, most notably the Netherlands (where the average payment delay stood at 3.9 days in Q1) and Germany (6.7 days). Positively, the UK outperforms Italy (18.5 days) and Portugal (30.9 days) and is ranked on a par with Spain.

AV E R A G E P R O M P T PAY M E N T S B Y R E G I O N Q 2 2 0 1 9

P R O M P T PAY M E N T B Y R E G I O N

AV E R A G E P R O M P T PAY M E N T B Y I N D U S T RY Q 2 2 0 1 9

P R O M P T PAY M E N T E V O L U T I O N I N C R I T I C A L S E C T O R S ( A G R I C U LT U R E , R I G H T A X I S )

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4 .0 CO R P O R AT E L I Q U I DAT I O N S

While payments performance improved in the second quarter of 2019, painting a picture of microeconomic strength, the number of corporate liquidations remained stable in the same period. In April-June, Dun & Bradstreet recorded 4,115 corporate liquidations, up by a marginal 0.2% q/q but down by 0.8% y/y.

A sectoral breakdown shows that 7 of 14 sectors we cover recorded a decrease in the number of liquidations in Q2, ranging from a 1.5% q/q drop in material processing to 15.0% in machinery manufacturing (thereby reversing a comparable increase in Q1). Five of the remaining seven sectors saw an increase in the number of liquidations, with the government sector seeing a surge of two-thirds (from 3 to 5), followed by personal services (up 19.7% q/q). The remaining two sectors saw a stagnation in Q2. Similar to previous quarters, the sector with the most business failures was business services, where the number of liquidations decreased from 887 in Q1 (and a record high 1,746 in Q4 2018) to 838 in Q2.

CO R P O R AT E L I Q U I DAT I O N S : R E TA I L T R A D E

In the retail space, the number of corporate liquidations fell, in both q/q and y/y comparisons. Compared against prior year, numbers decreased by 6.8%, while in q/q terms the number of liquidations went down by 10.7%. This comes after stark increases in previous quarters. Although retail liquidations currently account for less than a tenth of all corporate liquidations in the UK (382 out of 4,115), they tend to attract a large amount of media attention. This was not seen earlier this year when House of Fraser and Debenhams reported further financial trouble, which eventually led to the latter going into administration in early April 2019. House of Fraser was eventually rescued from administration by Sports Direct (which is now also reporting financial problems) but its department stores reported an operating loss of GBP54.6m in July, and more stores have been earmarked for closure.

Latest sales figures show the problem most retailers are currently facing: John Lewis department stores’ sales figures remained almost stagnant in 2018 (up 0.08% for the year as a whole), they fell in Q1 2019 before expanding by a meagre 0.4% y/y in Q2, whereas online sales in the UK continue to expand rapidly, putting pressure on ‘bricks-and-mortar’ shops. According to the Office for National Statistics (ONS), online retail sales (excluding fuel) rose by 14.5% in 2018 and 15.0% y/y in Q1 2019 before growing by 10.2% in Q2. This comes on top of 21.1% growth in 2016 and 16.0% in 2017.

Since the start of the ONS data series in 2008, online retail sales (as a percentage of total retail sales minus fuel in the UK) have increased from 4.2% in January 2008 to 18.2% in June 2019 (although the latter figure was down from March’s 18.9%). It seems likely that this trend will continue over the next few years, adding to the problematic operating conditions the sector is facing. Also worryingly, rising wages, higher fuel costs and more difficult access to credit also create problems for retailers, with consumer confidence dented by the political uncertainty around Brexit. At the same time, the number of personal insolvencies in England and Wales hit an eight-year high in 2018 – reaching 115,319 – also impacting on consumer spending. Positively in this light, the Q1 2019 figure (31,527 personal insolvencies) fell by 8.1% q/q but was still up by a sizable 15.9% y/y.

As a by-product of the decline of the high street, commercial property landlords are facing an uncertain future. Given the oversupply of retail space in town centres, rents are likely to fall over the medium run. In addition, troubled chains (such as the already mentioned Debenhams and House of Fraser) are likely to use so called Company Voluntary Agreements to enable them to reduce rent payments. Latest data shows that one in nine shops in the UK’s 650 biggest towns and cities is currently empty. Some 3.6% of all shops in the UK have now been empty for more than three years, with the North East of England and Wales displaying a much higher share (6%). An increasing number of landlords are converting shops to offices, warehouses or residential buildings.

B U S I N E S S L I Q U I D AT I O N S

R E TA I L S E C T O R I N S O LV E N C I E S & S A L E S V O L U M E

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CO R P O R AT E L I Q U I DAT I O N S : CO N S T R U C T I O N

Dun & Bradstreet business failure data for the construction sector shows a different trend to retail: Q2 saw a rise of the number in liquidations, both in q/q terms (+4.8%) and y/y terms (up 4.4%). Overall, 718 companies filed for insolvency in April-June. The sector is of importance for the UK economy, as it contributes some £90bn in gross value added and supports 2.9m jobs.

Problematically, latest high-frequency indicators point towards a cooling in the construction sector. The Purchasing Managers’ Index dropped to 43.1 in June, below the neutral 50-points line that divides expansion in sectoral activity from contraction. The June reading is the steepest drop in construction sector output since April 2009. All three sub-categories (residential, civil engineering, and construction) are reporting declining output, with the fall in house-building being the biggest in three years. Commercial building work has now been falling for half a year, and is the worst-performing area of construction activity. ONS data shows that new orders in the construction sector fell in all four quarters of 2018, with July-September recording a 30.2% y/y drop, the sharpest deterioration since the financial crisis. Positively, Q1 2019 saw a 10.2% y/y increase in order inflow, but uncertainty around Brexit has triggered many delays in building works.

C O N S T R U C T I O N O U T P U T A N D I N S O LV E N C I E S

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Dun & Bradstreet’s statistical analysis reveals that some 4% of UK businesses are deemed to be at high risk of liquidation and are highly likely to pay in a severely delinquent manner, while 82% offer a low risk both of failure and of slow payment. Sales emphasis towards these latter businesses will enhance opportunities and enable suppliers to reduce risks of non-payment. Additionally, some 13% of UK businesses fall within the lower risk categories and are thus less likely to fail; however, the payment habits they exhibit are somewhat slow, and while suppliers can be fairly secure in the knowledge that the business will not fail, payment may be somewhat protracted.

D U N & B R A D S T R E E T ’ S O V E R A L L R E CO M M E N DAT I O N S

– Monitor the number of corporate liquidations carefully: the latest data shows an overall stagnation, but a sectoral breakdown reveals a mixed picture.

– In this light, monitor the retail sector closely: it is still experiencing a high level of stress as consumer patterns are shifting, while supply chains could become endangered amidst Brexit.

– Keep in mind that average payment delays in the UK have been falling over recent quarters, but also remember that sectoral differences remain sizable.

– Base business decisions on the assumption that the UK’s payments performance will be largely in line with the European average but worse than the Netherlands and Germany.

– Assume that payments performance in the construction and agricultural sectors will be good, while manufacturers tend to pay relatively slowly.

– Follow Brexit developments in parliament closely, as the UK’s economic performance (including payments performance and insolvency risk) will suffer significantly should the country leave the EU without a deal.

– Even in the case of a Brexit deal, assume that real GDP growth will come in between 1.3% and 2.0% over the next five years – rather low figures by historical standards.

– Count on rising wage costs, as labour market conditions will remain good over the coming quarters.

5 .0 R I S K O F FA I LU R E A N D PAY M EN T D EL I N Q U EN C Y – I N D U S T R Y S EC TO R CO M PA R I S O N

R I S K O F FA I L U R E

RISK (Rating 1,2,3)

Minimal to above average risk

HIGH RISK (Rating 4)

CASH VULTURES

UK AVERAGE – 13% RETAIL – 7%

CONSTRUCTION – 13%Offer discount for prompt paymentCharge interest on late paymentsReset payment terms accordingly

Improve relationship with client to induce prompt payment

TROUBLE – LET YOUR COMPETITORS HAVE THEM

UK AVERAGE – 4% RETAIL – 4%

CONSTRUCTION – 4%Increase prices to cover risk

Reduce exposure – stop orders until paidTake guarantees

Monitor vigorouslyAvoid new clients with this profile

Up-front payment

IDEAL CUSTOMERS – CULTIVATE

UK AVERAGE – 82% RETAIL – 88%

CONSTRUCTION – 82%

Push for more sales Strengthen relationship with client

MONITOR CLOSELY

UK AVERAGE – 1% RETAIL – 1%

CONSTRUCTION – 1%

Reduce exposure – minimise outstanding orders Monitor vigorously Take guarantees

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