More than three years after the U.K. voted to leave the European Union (EU), it has accomplished that goal. On Friday, January 31, at midnight CET, the U.K.'s exit became a reality through a structured withdrawal agreement. While attention now turns to the future, the U.K.'s departure is bringing difficulties to the nation's businesses in the near term.

Now that the Brexit date has passed, the U.K. can begin to negotiate new trade agreements in earnest. The most important of these will define the country's future trading relationship with the EU. Current U.K.-EU trading arrangements remain in place only until December 31, 2020. This short timeline makes it likely that the deal reached this year will be limited in scope, which could potentially spell a painful adjustment in 2021.

Worse, should the two parties fail to negotiate a trading agreement by the end of the transition period, they risk falling back on World Trade Organization (WTO) rules. The pressures on the economic environment and the underlying uncertainties continue to take a toll across U.K. and EU markets.

The long period of uncertainty has created a climate of negative sentiment, and this may persist throughout the year in the absence of details about the U.K.'s future trading relationship with the EU. After stagnating in 2019, U.K. business investment will likely stay flat again this year amid low confidence and high uncertainty. U.K. economic growth is forecast to slow to a meager 1 percent in 2020, cushioned to some extent by fiscal and monetary support from central bank sources. Many businesses have already been debilitated by the volatile conditions plaguing the British economy since the 2016 referendum. These companies remain at significant risk of insolvency.

Business Insolvencies Are Increasing in the U.K.

Insolvencies can be expected to increase among U.K. companies. They have been growing significantly since 2018, increasing 8 percent year-on-year in 2019, and we expect another increase of 7 percent or more in 2020.

The retail sector continues to face bankruptcies due to lower consumer confidence and the changing dynamics within the sector. Heavily dependent on seasonal opportunity, retailers often look to December sales to bolster performance. However, total annualized retail sales fell in November and December 2019, according to industry body British Retail Consortium.

For British sectors dependent on imports—food and agriculture, in particular—Brexit remains a factor. These businesses may struggle to absorb any higher import and logistics costs that result from the separation.

The U.K. construction sector is already challenged by weak investment. The prospective loss of skilled labor from EU nationals who can no longer work in the U.K. is creating risk for construction companies, which may have to increase costs in order to attract workers. These factors may further elevate the risk of insolvency in the sector.

Downside Risks Increasing in the EU

At the same time, we expect to see a rise in business failures throughout most of Europe, albeit at a rate lower than in the U.K. The countries with the closest trading ties to the U.K.—such as Ireland—are at higher risk. Insolvencies in Belgium, the Netherlands, Denmark, and other important trading partners are likely to be visible but more limited. That said, the business climate remains volatile across Europe and the overall risk of business failures is rising.

Industry sectors that rely heavily on exports to the U.K., such as automotive, textiles, and high-tech goods, can be expected to experience more significant impacts. Still, individual businesses continue to report successes in certain markets.

How Foreign Companies Can Mitigate the Risks

There is an opportunity for trade growth, both during and beyond the transition period. Most of these opportunities lie in markets outside the EU, as the U.K. negotiates direct trade deals with countries such as the United States, where previously, negotiations would have occurred at the EU level. In addition, now that the U.K. can set its own regulations in areas such as manufacturing, it may be able to amend certain working directives that ultimately will provide a competitive advantage over EU businesses.

One of the keys to success will be a robust risk management strategy that combines access to reliable business intelligence with specific risk mitigations tools. Trade credit insurers, for instance, closely monitor insolvency trends and offer financial protection to provide peace of mind throughout the lifecycle of a trade relationship.

David Culotta, CFA, is the senior manager of U.S. buyer underwriting for Atradius Trade Credit Insurance Inc. located in Hunt Valley, Maryland. In this role, he is responsible for providing strategic direction for the U.S. underwriting platform and for monitoring the development of the U.S. portfolio and adapting the risk management approach as necessary. Culotta earned his MBA at Loyola University Maryland and is a CFA charterholder.