UK’s productivity weakness to hamper businesses and growth
Allianz Trade publishes its third Country Risk Atlas, a flagship publication that assesses the economic outlook, risks, and opportunities across 83 countries, representing approximately 94% of global GDP. It is based on a proprietary risk ratings model that is updated every quarter with the latest economic developments and Allianz Trade’s proprietary data.
“Our ratings provide comprehensive analysis and insights into the economic, political and business environment, as well as sustainability factors that influence trends in non-payment risk for companies at a macroeconomic level. Each rating combines 17 short-term and 18 medium-term indicators and serves decision-makers as a pragmatic compass in a polycrisis world, helping to navigate volatility, protect cash flows and turn risk awareness into a competitive advantage”, explains Luca Moneta, senior economist for emerging markets at Allianz Trade.
UK Economic Overview
UK growth is expected to cool in 2026 due to persistent productivity weakness and elevated borrowing costs
The UK remains a low‑risk environment for enterprise, but a lack of private‑sector productivity is emerging as a central threat to future growth. While the country retains its AA1 rating growth is expected to cool in 2026 (GDP +1% vs +1.3% in 2025), as policy‑driven tailwinds fade and elevated borrowing costs weigh on business investment.
In 2025, growth was supported by strong business and residential investment ahead of expected tax hikes. Rapid wage growth, fuelled by government policies, also helped to power consumer spending, but most of these policy-driven factors will fade through 2026. While GDP growth should pick up slightly in 2027, supported by past monetary easing, the economy has little spare capacity to grow much faster than +1.5%.
Business insolvencies have broadly stabilised since 2024, but at an elevated level. While a sustained decline in overall insolvencies is expected through 2027 due to looser monetary and financial conditions, as well as easing wage and prices pressures, insolvencies are expected to remain above pre-pandemic (2012-2019) averages.
Moreover, the UK continues to score poorly on public and external balances. Gross public debt-to-GDP ratio now stands at around 100%, versus 85% in 2019 before the Covid-19 crisis, and is expected to continue rising through 2027 at least. While the government has committed to fiscal discipline, most consolidation measures are delayed until after 2027, undermining credibility with financial markets, keeping borrowing costs elevated for both the public sector and the private sector – particularly mortgage rates.
“We see a lack of private sector productivity growth in the UK as a growing concern for businesses. Most policy eggs have been put in the public sector growth basket, but now, with little fiscal headroom, we expect those positive outcomes, including a 2.3% annual increase in public sector employment, to be short-lived. Though the Bank of England can ease some tensions by reducing interest rates, thus allowing for more favourable business lending conditions, the UK economy is increasingly beholden to the bond markets, which have effectively increased the rates the Treasury needs to borrow. In turn, this has a negative impact on the debt markets in the UK, including mortgages. All in all, we’ve seen a short-term, sugar rush in the public sector, but a revived and confident private sector, which is facing more employment taxes, will be needed to change the long-term economic story for the UK”, states Maxime Darmet, senior economist for the UK, France and US, Allianz Trade.
Political uncertainty is adding to these pressures. Falling public support for the government and growing internal divisions have increased the risk of policy instability, which markets have been quick to price in.
Strong institutional framework currently offset the UK’s weak external fundamentals
The UK continues to benefit from a strong institutional and regulatory framework, supporting its position as a low‑risk environment for enterprise. It scores relatively well on economic freedom, ranking 33rd in the Economic Freedom Index, underpinned by robust property rights enforcement, judicial effectiveness, and high levels of business, trade and financial freedom. Governance indicators also remain strong, with high scores for regulatory quality, rule of law and control of corruption, confirming the UK’s attractiveness as a place to do business.
However, these strengths are increasingly challenged by weak external fundamentals and mounting structural constraints. The UK has run a substantial current account deficit for many years, with strong services exports insufficient to compensate for deteriorating goods export performance. High inflation has contributed to a marked appreciation of the real effective exchange rate, further weighing on competitiveness. At the same time, Brexit‑related trade frictions continue to affect trade with the EU, the UK’s main trading partner, despite welcome progress on targeted agreements and gradual easing of barriers, including on food standards.
Domestically, fiscal health remains a key weakness. High government spending continues to crowd out private sector activity, while rising taxation – notably the recent increase in employers’ National Insurance contributions – is weighing on business sentiment and investment decisions. While government initiatives to ease planning constraints and strengthen the healthcare system are steps in the right direction, low productivity growth and inflation overshoots remain significant impediments to a meaningful improvement in the UK’s medium‑term fundamentals.
Global outlook
Against expectations, global country risk improved in 2025
Despite a year marked by intense trade tensions and multiple layers of risk (political, geopolitical and fiscal), Allianz Trade finds that global country risk improved in 2025, with 36 country risk ratings upgraded for only 14 downgraded. This trend underscores the fiscal, monetary and trade-related coping mechanisms that tend to emerge in times of high uncertainty. The 36 economies with improved ratings include Argentina, Ecuador, Hungary, Italy, Spain, Türkiye and Vietnam.
“In 2025, the upgrades were driven primarily by stronger macroeconomic fundamentals, supported by more accommodative fiscal and monetary policies. In several emerging markets, better financing conditions, appreciating local currencies, and higher commodity prices allowed for a rollback of transfer and convertibility restrictions, a key dimension of political risk. Among high-income economies, improved political stability, disinflation and stronger trade performance reinforced resilience across Europe (notably Germany, Greece, Italy and Spain) and the Asia-Pacific region (including South Korea and Vietnam)”, states Ana Boata, head of economic research at Allianz Trade.
Broad improvements masking persistent medium-term risks for corporates
While the number of downgrades may seem low, it is important to note that it has almost tripled compared to 2024 (from 5 to 14). Furthermore, some key economies like France, Belgium and the US are part of the list, highlighting persistent medium-term headwinds for corporates.
“Resilience broadens, but risk clusters persist in important economies. For instance, last year, we saw a deterioration in the medium-term macroeconomic environment in 7 markets, compared with 18 that improved. However, these deteriorations include Belgium, Brazil, France and the US, which together account for about one-third of global GDP, meaning ten times as much as the economies that saw an improvement. The global economy is undergoing one of its most turbulent periods in decades, with a convergence of shocks and structural shifts such as AI, demographics, climate change, trade, and regulation. Uncertainty remains elevated, and corporates must go for a selective, country-by-country approach so they can expand their business while safeguarding their assets. This underlines the need for granular, forward-looking risk management that goes beyond headline ratings. Continuous monitoring of transfer and convertibility conditions, fiscal trajectories, and trade exposures will be essential to anticipate turning points”, ends Aylin Somersan Coqui, CEO of Allianz Trade.