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A world of opportunity awaits

Faced with various ongoing and structural challenges, 2022 is set to be another challenging year for trade and export. But growth and export forecasts are robust, and there are plenty of opportunities for resilient businesses with the right strategies in place. Divyesh Modi, UK Head of Trade Finance and Working Capital, discusses.

Following the disruption to international trade of 2020, last year was one of recovery, with the UK seeing increased volumes of both imports and exports. GDP bounced back and was on a growth trajectory for most of 2021. However, growth slowed towards the end of the year, and many industries are not yet back to their pre-pandemic levels.

Looking ahead, the OECD’s most recent forecast^ from early December suggests that UK GDP will grow by around 4.7% during 2022 – a healthy growth rate, although slightly lower than previous estimates as a result of the emergence of the Omicron variant and renewed uncertainty.

Supply chain disruption here for the long haul

From a trade and working capital perspective, the well-publicised supply chain disruptions have perhaps had the single biggest impact on industry over the past 12 months, with the food and beverage and manufacturing sectors suffering most. Although this predominantly pandemic-fuelled disruption has affected most economies around the world, some of the issues in the UK have been compounded by Brexit. This ongoing disruption played a key role in dampening 2021’s growth prospects.

While we expect to see supply chain pressures easing off during 2022 – with container prices already softening a bit, for example – it’s become increasingly evident that the disruption is not merely a short-term problem. Many of these supply chain issues are more structural in nature and businesses will need to factor in higher prices and reliability issues throughout the year.

They will also need to devise longer-term solutions to mitigate disruption, build resilience and manage their supply chains for strategic advantage. Trade finance solutions and working capital management have a key role to play helping to mitigate such supply chain risks.

Where did all the people go?

Labour shortages and churn also emerged as significant issues for businesses and their supply chains during 2021 as companies across all industries struggled to attract, recruit and retain employees. While the government’s furlough schemes are partly responsible for this, the pandemic has also given rise to the phenomenon of the so-called Great Resignation, with many people apparently re-examining what they want from their lives and work and choosing to look for new opportunities. As a result, businesses now need to find new ways to incentivise talent, which in turn could have a knock-on effect on their financial planning.

Inflation, interest rates and liquidity

In the face of ongoing inflationary pressure and a tight labour market, the Bank of England raised the interest rate from its historic low of 0.1% to 0.25% in December. Although there is considerable debate among economists about whether the high levels of inflation are a transitory phenomenon, it is also looking increasingly structural. As a result, we expect to see at least two further interest rate rises this year.

Considering the numerous challenges that businesses faced over the course of 2021, we might have expected an increase in borrowing. Instead, we saw the reverse, with reduced demand for borrowing and many businesses with increased liquidity. While this has been in part due to government stimulus and support schemes, many businesses have also focused on more efficient payment and collection processes.

However, given the forecasted growth, ongoing supply chain disruptions, interest rate hikes and expected reductions in government support, we expect businesses to increase borrowing during 2022.

Furthermore, as inventory management moves from ‘just in time’ to ‘just in case’, there will be increased pressure on working capital cycles, along with greater demand for funding and supply chain financing.

With the UK Government increasingly focused on promoting overseas trade, export finance is likely to be key in the coming years. The Government is broadening the range of solutions and support available through UK Export Finance to help fuel export growth, and businesses with the capabilities and appropriate financing in place to break into new markets should be in a good position to secure a competitive advantage.

The move to net zero

The pressure on businesses to demonstrate their commitment to environmental, social, and governance (ESG) issues has continued to gain pace over the past year. And the outcomes of the COP26 Summit last autumn demonstrate that this pace of change is only likely to increase as the world attempts to tackle the urgent climate crisis and transition to net zero.

With businesses, supply chains, government agencies and financial institutions all signalling their determination to accelerate decarbonisation efforts, ESG is no longer simply about box ticking – it’s core to business strategy. These credentials will increasingly becoming a key success factor in funding applications, trade finance, and supplier selection. Organisations that don’t yet have an ESG strategy in place will need to make this a priority.

In challenge there is opportunity

Many businesses have shown great resilience and creativity in adapting to trying circumstances over the past 12 months. Despite the numerous and ongoing challenges, there are strong indicators of economic recovery and trade-led growth: The World Trade Organisation estimates world merchandise flows increased by 10.8 in 2021, and has forecasted additional 4.7% growth in 2022.

Given the strong global demand for UK exports, and the various export support mechanisms becoming available, we believe 2022 could be a good year for UK trade and exports – providing many strategic opportunities for those businesses with the necessary capabilities and attitude to seize and capitalise on.

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