Largest manufacturing regions apprehensive over post-Brexit prospects

01 August 2017 Consultancy.uk

Some of the UK’s largest manufacturing hubs are increasingly unnerved by the uncertainty of Brexit. While many regions actually seemed more upbeat than before last year’s Brexit vote, businesses in the South East and London and the North West regions have seen falling confidence while negotiations by the EU and UK government continue to clarify little. Meanwhile, investment into the sector remains lacklustre, with a number of regions seeing a negative net result compared to three months previous.

Manufacturing continues to be a key aspect of the UK economy, with areas such as the East Midlands and Wales, deriving a huge portion of their regional GVA from manufacturing, in these cases 17.1% and 16.8% respectively. The sector is thought to have become increasingly vulnerable in the light of the Brexit vote of 2016, as it faces an uncertain future with the potential for the levying of export tariffs still on the cards should negotiations between the UK and EU continue to run poorly.

A new report from BDO and The Manufacturers’ Organisation (EEF), looks at attitudes of manufacturers across the various regions of the UK for July 2017, compared to a survey taken before the EU membership referendum last year. The report is based respondents to EEF’s Quarterly Manufacturing Outlook survey, and is the result of the net balance between positive and negative responses.

Regional confidence

The latest report found that many manufacturers remained confident about the prospects for their business. North East businesses are the most positive, with a +0.8 increase in their Business Confidence Indicator, from 5.8 to 6.6. Yorkshire and Humberside manufacturers too are relatively upbeat, with an +0.4 increase to 6.8. Most regions saw confidence gains in the most recent report.

However, not all regions follow this pattern, and in South East and London, for instance, confidence scores have fallen by -0.5, to 6.8. While this is a single result compared to the numerous positive opinions, it is significant as the region is one of the largest manufacturing hubs in the country, employing more than 406,000 people, even while its relative output remains low at 3.8% of the region’s total workforce. Confidence in the North West, which accounts for a further 318,000 jobs, has also fallen -0.5, from 6.3 to 5.8.

Regional summary

The study further considered the annual balance of change, as a %, of various economic indicators related to key manufacturing conditions between Q3 2016 and Q2 2017. The East Midlands saw the biggest increase in output, with a 31% increase, while orders and investment were up 22% and 12% respectively. The Eastern region saw the biggest decrease in investment, down -12%, while output and orders were up 21% and 22% respectively. The West Midlands saw the biggest increases, clocking a 31% rise in output, a 25% increase in orders and a 19% increase in employment.

Wales suffered drops in output changes, with output at 6%, orders at 30% and investment and employment at 6% and 13% respectively. The North East meanwhile saw its orders fall, while Scotland saw lower rates of employment growth, at 6%.

Confidence and supply

The study found that overall, annual average balance of change has been positive for output, up by 16%, with the majority of regions outperforming the average – which was pulled down by poorer performances in Wales and Scotland, the former struggling with lower consumer confidence affecting food and drink demand. Total orders too was up by double digits, at 15% on average – the North East and Scotland pulled down the average somewhat, although the latter is performing better as manufacturing diversifies and oil and gas prices stabilise.

UK orders and export orders

UK orders reflected a mixed bag result, with the West Midlands seeing a massive boost on the back of continued strong demand for vehicles across the globe, with automotive supply chain companies in the region too benefitting from increased demand. Scotland performed relatively poorly on orders, compared to its stronger performances in output and employment – which continues to recover from a loss of -5.3% since 2010.

Export orders have remained high for the West Midlands and East Midlands, the former in particular benefitting from global demand for its vehicle manufacture. Overall the UK has seen an annual average balance of change for export orders over the past three months of 10%. Wales, however, saw a slight negative result – the region remains heavily dependent on export to the EU, which may be impacted by tariffs as a result of the completion of Brexit – particularly in the event of a dreaded “No Deal” scenario, which embattled Prime Minister Theresa May has previously hinted she favours over making concessions on free movement and single market membership.

Employment and investment outcomes

The BDO report also claims that employment saw healthy gains across all regions, with the annual average % balance of change for the past three months across the country as a whole at 10%. Wales here scored slightly above average, with its total employment in the sector up 10.6% since 2010; while the West Midlands and Yorkshire and Humber annual average balance change hit almost 20% apiece, with the latter noting a manufacturing employment increase of 12.3% since 2010 – the biggest in the country.

While in the past year employment may have improved however, recent data from the Office of National Statistics, confirmed over the past decade the UK has seen the number of manufacturing jobs fall by 17%, with around 620,000 jobs lost. The North-West, which remains one of the most pessimistic regions in BDO’s study regarding Brexit, was one of the worst hit regions, haemorrhaging 77,000 jobs since 2006, which comes as part of a larger decline of traditional labour in the area.

With investment in manufacturing over the coming 12 months remaining lacklustre, at an average of around 4% as a balance of change, the bounce of employment in the sector is likely to be short-lived. The North East is the strongest performer, at almost 15% investment rates, while the Eastern region has a negative result of around 12%. The North West and Yorkshire and Humber too clock negative results, suggesting a seismic shift in employment in the region may occur even before the completion of the Brexit project.

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