UK Firms Accelerate Global Expansion Amid Domestic Headwinds

UK small and medium-sized businesses are suddenly eyeing the world stage with renewed ambition. A striking 28% of UK SMEs now plan to expand internationally within the next three years, according to Santander UK's Spring 2024 Trade Barometer. This surge isn't just about future potential; nearly a quarter of firms already exporting are betting big, expecting more than half their revenue to flow from overseas markets in the next year – a figure that has doubled since 2022. The United States dominates as the primary target, chosen by 35% of UK firms looking abroad, followed by Australia and Canada, while interest in traditional EU markets has waned. Despite lingering geopolitical tensions and macroeconomic uncertainty keeping overall UK business confidence (75%) notably below the US level (82%), this wave of international ambition is tangible. Santander itself facilitated market entry for 450 UK enterprises in 2023 alone, signaling substantial momentum. This pattern suggests growing SMEs are actively seeking diversification and growth avenues beyond domestic constraints, potentially positioning them as resilient players in an uncertain global landscape.

Despite persistent challenges, the UK economy is actively reshaping its export landscape, pivoting away from traditional EU dependencies toward new global opportunities. This strategic shift, driven by post-Brexit recalibration and evolving global dynamics, is beginning to show tangible effects on trade flows and the nation's financial position. The mechanism is clear: reduced reliance on the EU bloc, coupled with targeted growth in non-EU markets, particularly the United States for sectors like chemicals and machinery, is altering the export composition and impacting the trade deficit. Total annual goods exports in 2024 saw a modest increase of £6.1 billion (0.7%), contributing to a narrowing of the annual trade deficit to £25.1 billion, a positive sign despite the persistent goods deficit. However, this positive annual trend masks significant quarterly volatility, as evidenced by a sharp Q4 2024 trade deficit widening to £10.0 billion, primarily driven by a massive £53.8 billion goods deficit.

The diversification effort faces headwinds, including post-election uncertainties in key markets like the US, which hinder the full realization of non-EU export potential. Sectoral performance highlights both the opportunities and ongoing challenges: while innovative areas like cutting tools and additive manufacturing machinery showed explosive growth (+56% and +207% respectively), traditional sectors like metalworking machinery experienced declines (-9%), reflecting the complex transition. This pivot is fundamentally reshaping the UK's export earnings profile, demonstrating progress in reducing EU share (exports fell to 48.6% of total, the lowest since 2016) but also underscoring that the transition remains fragile and susceptible to global shocks and data reporting anomalies, as seen with HMRC errors concerning China and Japan imports. The earnings impact is thus a mixed picture: annual improvement in the deficit versus quarterly setbacks, sectoral wins alongside significant losses, signaling both the potential and the peril of the non-EU export strategy.

The UK economy faces significant headwinds in its quest for renewed export growth. Recent data reveals a sharp contraction in overseas sales, with goods exports plunging 4.9% year-on-year to £359.1 billion in 2024 according to the MTA. This decline deepened the trade deficit to £201.4 billion, a stark reversal from the £247 million surplus recorded just a year earlier. The picture is complicated by structural challenges rooted in the UK's post-Brexit relationship with Europe. The Office for Budget Responsibility (OBR) estimates that Brexit's Trade and Cooperation Agreement has slashed UK productivity by 4% in the long term compared to EU membership, projecting exports and imports to remain 15% lower than they would have been. Furthermore, new trade deals with partners like Japan and Australia are forecast to deliver only marginal economic benefits, adding just 0.1% to GDP over fifteen years. Non-tariff barriers and slow progress on new agreements continue to hinder UK firms navigating global markets.

Yet, beneath these challenging fundamentals lies a notable source of potential resilience: the ambition of British small and medium-sized enterprises. Santander UK's Spring 2024 Trade Barometer signals surprising optimism among these businesses. A quarter of UK SMEs are actively planning international expansion within the next three years-the highest proportion in two years. Remarkably, 28% of current exporters now anticipate deriving over half their revenue from abroad within a year, more than doubling the share seen in 2022. Geopolitical shifts and macroeconomic uncertainty are influencing strategy, with the United States emerging as the top target for expansion (chosen by 35% of firms), while interest in traditional EU markets wanes. This entrepreneurial drive, evidenced by Santander facilitating market entry for 450 UK SMEs in 2023 alone, represents a critical counterpoint to the broader export slump and suggests pockets of significant upside potential if structural barriers can be overcome.

The UK's trade picture presents a mixed but pivotal signal heading into 2025. While the annual trade deficit narrowed significantly in 2024 to £25.1 billion, this improvement masks substantial volatility and underlying structural shifts. December 2024 saw goods exports stabilize, driven by a notable 3.5% rise in shipments outside the EU, particularly to the US for chemicals and machinery. This positive momentum, however, sharply contrasts with the annual reality: UK goods exports overall fell 4.9% year-over-year to £359.1 billion in 2024, resulting in a massive £201.4 billion goods deficit. The most critical development is the fundamental rebalancing of trade relationships. Exports to the EU plummeted to just 48.6% of total goods exports – the lowest share since 2016 – while imports from the EU rose to a 56-year high of 55.3%. This widening dependency gap, despite the non-EU growth surge, creates both vulnerability and opportunity. The stabilization in December offers a near-term tactical signal: non-EU market diversification may be starting to gain traction after years of Brexit and global supply chain disruption. However, the persistent Q4 weakness (-6.9% compared to the same quarter in 2023) and the overwhelming EU import dependency highlight the immense challenge ahead. The core strategic question is whether the December stabilization reflects a genuine, sustainable shift in export momentum towards non-EU markets, or just a temporary respite against a backdrop of deep structural weakness. This divergence – short-term stabilization versus annual decline and shifting dependencies – defines the critical opportunity and risk landscape for UK exporters and policymakers entering 2025.