United Kingdom

Improving real wages will support a slow economic recovery

Inflation has declined to around the 2% target but is projected to stay slightly above this level throughout the remainder of 2024 and into 2025. The persistent trend is driven by stubbornly high inflation in the service sector and the re-emergence of price pressures on goods due to labour costs as well as recent supply chain pressures. The labour market has normalised somewhat with unemployment and vacancy rates back to pre-pandemic levels. However, given that labour supply is still tight, and the economy is recovering, unemployment is expected to remain around its current rate (4.2-4.6%). The limited labour supply and current unionised salary agreements are expected to continue to drive higher nominal wage growth in 2025.

The Bank of England (BoE) initiated its first rate cut in August 2024, thus marking the beginning of a gradual easing cycle. However, the pace of rate cuts is expected to be slow, meaning that interest rates will remain elevated throughout 2025. Household confidence is continuing to improve as inflation eases and nominal wages are picking up. Along with only marginally higher unemployment, household consumption is expected to improve and support domestic growth, which will be further supported by rising house prices that will increase people’s net worth.

Overall exports are seeing a rebound after bottoming out in early 2024, partly on back of a recovery of merchandise trade but particularly due to service exports which have been growing steadily. Nevertheless, the introduction of border checks introduced in 2024 is expected to continue to cause some friction and higher costs of trade between the EU and the UK. The current business environment is characterised by a cautiously optimistic outlook as the credit landscape, though tight, shows signs of improvement partly due to gradually falling interest rates. However, the rise in banks’ non-performing loans presents a challenge and is tempering some of this optimism. We anticipate a modest increase in insolvencies in 2024 – after already +12% in 2023 – driven by the financial strain on businesses, particularly those struggling with debt. However, the situation is expected to stabilise by 2025 as the economy adjusts. Despite these improvements, rollover risk remains high for companies with fixed-rate debt posing an ongoing threat to their financial sustainability, and insolvencies remaining much higher than before the pandemic.

Gradual improvements in fiscal situation but more borrowing is expected

The new government's economic policies aim to stimulate growth by prioritising investments in infrastructure, energy, transport, and housing. However, the effectiveness of many of these policies is dependent on the passing of a potentially controversial Planning and Infrastructure Bill, which is expected to face significant local opposition due to concerns over environmental and community impacts. The bill is expected to be implemented by mid-2025 if it does not face too much resistance. Additionally, the government's limited fiscal headroom has restricted the scope of its initiatives, with many of its initial policies either being legislative in nature or trying to attract private investments. However, given the government’s intentions and its self-imposed limit on significant tax rises, it is expected that public finances will improve more slowly than indicated in the previous budget.

In 2024 and 2025, the UK's fiscal situation is expected to undergo a marginal narrowing of the fiscal deficit, primarily driven by strong tax revenue collection. The improvement will be fuelled by rising wage growth, low unemployment, and higher consumption levels, which bolster tax income. Although the new government plans to implement some tax increases, the primary contribution to the deficit reduction will come from these robust economic factors rather than from significant policy shifts. Although government spending is also expected to rise under the new administration, the debt burden is anticipated to gradually decline over time, reflecting the slight fiscal improvements and cautious management. The BoE is expected to continue offloading its government bond holdings in 2025. At September 2024, these holdings amount to GBP 658 billion, following reductions of GBP 80 billion between October 2022 and September 2023, and a further GBP 100 billion from October 2023 to September 2024. The BoE is expected to focus primarily on cutting back on its holdings by allowing bonds to mature rather than actively selling them, with approximately GBP 80 billion in bonds set to mature over this period.

In 2025, the UK's current account is expected to show signs of improvement, with the persistent deficit in the balance of goods being partially offset by a surplus in the balance of services. Service exports are anticipated to continue their positive trajectory, bolstered by the UK's strong global position in sectors such as finance and professional services. Additionally, while imports will be driven by accelerating private consumption, goods exports are forecast to rebound faster in 2025 after hitting a low in early 2024, thereby contributing to a more balanced trade outlook. Although the border check arrangement introduced in 2024 is expected to continue to cause friction and higher costs of trade between the EU and the UK, the impact is expected to be relatively minor, allowing for gradual progress in export performance.

The new government will be limited by fiscal situation but expected to be proactive and ambitious

The Labour Party and its Prime Minister Sir Kier Starmer won a comfortable majority in the July 2024 elections, gaining 411 seats (up 214 seats from the previous general election) and well clear of the 326 needed for a majority. The incoming government is expected to be relatively centrist and fiscally conservative but more proactive around building and industrial policy. However, unless it increases taxes or government borrowing, the administration will be limited by fiscal restrictions.

While strike action eased in 2024, the first half of the year still saw 465,000 working days lost due to industrial action. The situation should ease in late 2024 and 2025 as Labour have been quick to mention the possibility that public wages should increase to tie in closer to recommendations by independent pay review bodies (around 5.5%) and has agreed new pay offer deals with both the train union (Aslef) and junior doctors (BMA).

The Labour government is expected to take a closer stance with the European Union (EU) than the previous government, even if Kier Starmer has made it clear “about not rejoining the EU, the single market or the customs union or a return to freedom of movement”. The recent draft Product Safety and Metrology Bill is an example as it will make it easier to align UK and EU legislations.

Payment

Cheques are still used for domestic and international commercial payments, although bills of exchange and letters of credit are preferred for international transactions. Bank transfers – particularly SWIFT transfers ? are also often used and are viewed as a fast and reliable method of payment. Direct Debits and Standing orders are also recognised as practical solutions for making regular or anticipated payments and are particularly widely used in domestic transactions. It is acceptable to issue invoices both before and after the supply of goods or services.

Debt Collection

AMICABLE PHASE

The debt collection process usually begins with the debtor being sent a demand for payment, followed by a series of further written correspondence, telephone calls and (if the value of the debt permits), personal visits and debtor meetings. The collection process has been designed as a progression of stages, beginning with an amicable (pre-legal) collection phase and escalating up to litigation, should the debtor fail to meet his obligations.

LEGAL PROCEEDINGS

The County Court only has civil jurisdiction. Judges handle claims for debt collection, personal injury, breach of contract concerning goods or property, land recovery and family issues (such as divorce and adoption). Cases valued at less than GBP 25,000 (or under GBP 50,000 for personal injury cases) must have their first hearing in the county court.

The High Court is based in London, but also has provincial districts known as “District Registries” all over England and Wales. It has three divisions: the Queen’s Bench Division, the Chancery Division, and the Family Division.

The Court of Appeal has two divisions – the Civil Division and the Criminal Division.

The Supreme Court is composed of a president, a deputy president, and twelve professional justices.

Fast-track proceedings (Summary Judgments)

In order to apply for a summary judgment, the claimant must obtain an Application Notice Form from the court. This should be supported by a Statement in which the claimant sets out why he believes that summary judgment should be given ? either because the defendant has no real prospect of successfully defending the claim, or because there is no reason why the case should be decided by a full trial.

A copy of this statement is served on the opponent seven days before the summary judgment hearing. The opponent also has the opportunity of presenting a statement, but this must be sent no later than three days before the hearing. The claimant cannot apply for summary judgment until the debtor has either returned an acknowledgment of service form, or has filed a defence. If the court agrees with the claimant, it will return a favourable judgment. The application will be dismissed if the court does not agree with the claimant.

Ordinary proceedings

There are now identical procedures and jurisdictions for the County Court and the High Court. A number of litigation “tracks” have been created, each with their own procedural timetables. Claims are allocated to a track by a procedural judge, according to their monetary value. There are transaction processes that need to be followed before initiating a court action. These processes have been designed to encourage the parties concerned to settle disputes without the need for court proceedings, thus minimising costs and court time.

Proceedings formally commence when the claimant (formerly “the plaintiff”) files a Claim Form with the County Court or the High Court. Full details of the complaint are set out in the Particulars of Claim, which is usually a separate document which supports the Claim Form. The Claim Form must be served on the defendant by the court, or by the claimant. The defendant can then respond to the claim form within 14 days of service. A time extension of 28 days is agreed for the debtor to file a defence and/or a counter-claim. Once these formal documents have been exchanged, the court orders both parties to complete an “Allocation Questionnaire”.

Freezing order (formerly Mareva Injunction)

A freezing order (or freezing injunction) is a special interim order which prevents the defendant from disposing of assets or removing them from the country. One of the conditions attached to the granting of such an order is often that the applicant will pay full costs to the person against whom it was made, if it turns out to be inappropriate. A typical commercial dispute can take 18-24 months to reach a judgment, starting from the time legal action is first initiated.

Enforcement of a Legal Decision

A number of enforcement mechanisms are available. These include the Warrant of Execution (which allows a County Court Bailiff to request payment from the debtor) and the Writ of Fieri Facias for debts exceeding GBP 600, under which a High Court Enforcement Officer can make a levy on goods to the equivalent value of the judgment debt (for subsequent sale at auction and offsetting against the amount due).

As a member of the European Union, the UK has adopted several enforcement mechanisms for decisions rendered in other EU countries. These include EU payment orders which are directly enforceable in domestic courts and the European Enforcement Order, for undisputed claims. Judgments issued in non-EU countries are recognised and enforced if the issuing country has an agreement with the UK. If no such agreement is in place, an exequatur procedure is provided by English Private International?Law.

Insolvency Proceedings

ADMINISTRATION

Administration is intended as a rescue mechanism which enables companies (wherever possible) to continue with their business operations. The procedure is initiated either by applying to the court for an administration order, or by filing papers with the court documenting the out-of-court appointment of an administrator.

COMPANY VOLUNTARY ARRANGEMENT (CVA)

The CVA is an informal but binding agreement, between a company and its unsecured creditors, in which the company’s debts are renegotiated. It can be used to avoid or support other insolvency procedures, such as administration or liquidation. It provides for a restructuring plan which imposes the support of dissenting creditors.

CREDITOR’S SCHEME OF ARRANGEMENT

The Creditor’s Scheme of Arrangement is a court-approved compromise or arrangement, between a corporate debtor and all classes of its creditors, for the reorganisation or rescheduling of its debts. It is not an insolvency procedure and does not include a moratorium on creditor action. It can, however, be implemented in conjunction with formal insolvency proceedings, (administration or liquidation). It can also be implemented on a standalone basis by the debtor company itself.

RECEIVERSHIP

There are three types of receivers. The first of these is a receiver appointed with statutory powers. The second type of receiver is one who is appointed under the terms of a fixed charge or a security trust deed. The third category is an administrator (who is appointed under the terms of a floating charge over all, or a substantial share, of the debtor company’s property.

LIQUIDATION

A company can enter voluntary or compulsory liquidation. Voluntary liquidations can be either a “members’ voluntary liquidation” or a “creditors’ voluntary liquidation”. Both of these proceedings are initiated by the company itself, by passing a resolution during a meeting of members. The company then ceases trading and a liquidator collects the company’s assets and distributes the benefits to the creditors so as to satisfy, as far as possible, the company’s liabilities.

Last updated: August 2024