Stagnant wages mean manufacturers should be cautious in optimism

18 July 2017

Optimism continues to improve among manufacturers, as a low pound increases demand from the EU, however according to a new study the service sector continues to be hard hit by uncertainty and inflation, as consumers at home are hit by inflationary pressure and low real wage growth.

The UK continues to fall deeper into uncertainty, after June’s surprise election left a previously unassailable Theresa May clinging to power, having lost her Party’s majority in Parliament. With the Conservative government currently relying on an uneasy alliance with Northern Irish hardliners the DUP following the recent hung parliament, the EU meanwhile is increasingly frustrated with the UK – creating an uncertain negotiating ground for divorce proceedings, for what were already likely to be fraught negotiations.

The effect of the Brexit decision has continued to affect various segments of the market. In BDO’s May Monthly Business Trends Indices for the UK, the firm explores the recent numbers for output, optimism, inflation and employment.

BDO output index

UK output continued its downward trajectory in May, hitting 95.4 from 95.6 the month previous. The output slump saw levels fall to those last seen in May 2013, with the slump beginning in September of 2015.

The service sector was found by the survey to have considerable drag on the overall picture, falling from 95.3 to 95.0 between April and May – manufacturing in contrast, improved slightly, up in May to 97.7 from 97.1 the month previous.

Services continue to see lacklustre demands as consumers remained relatively subdued, while businesses themselves, in light of the General Election, have delayed actions temporarily that negatively affect their order books. Exporters have benefitted from a low pound, which has boosted their export competitiveness.

BDO Optimism Index

Optimism was up, the report notes, increasing by 0.3 to 102.8 in May. The increase was largely the result of the manufacturing sector, where optimism hit its highest point since late 2014 at 116.4. Service sector confidence, meanwhile, fell slightly from 100.7 in April to 100.2 in May.

The services sector is likely to face a raft of challenges this year, in light of pricing pressures, poor wage growth and falling consumer demand. Manufacturing meanwhile is enjoying demand from improved export orders – with improvement in the wider EU likely to further increase demand for exports from the UK.

While the manufacturing sector has been boosted by the recent fall in the pound, political uncertainties are still likely to negatively affect the segment in the long-term – particularly if tariffs are introduced and input inflation affects the wider supply chain.

BDO Inflation Index

Recent trends

The study also considered the current inflationary pressure affecting the wider market. The index found that inflation has, for the moment, plateaued at around 105 – although it remains relatively high. Annual Consumer Prince Index Inflation stood at 2.6% in April, up from 2.3% in March.

The increase in inflation was largely the result of increased costs for clothing, electricity and vehicle excise duty were up considerably, while food and non-alcoholic drinks rose annually by 1.6% to April – bucking a trend of almost two years of deflation.

The result of inflation means that in real terms, incomes are now lower than a year previous. The consequence is beginning to flow into consumer spending which is suffering, with a negative knock on effect for retailers.

BDO Employment Index

The employment index has remained relatively stable, at 103.3 in May. The index level reflects relatively consistent improvements to the unemployment rate in the UK, which fell from 5.1% in May 2016 to 4.6% this year, while the employment rate hit a record high at 74.6%.

Wage growth remains sluggish however, with average earnings, up 2.1% between Q1 2016 and Q1 2017, while inflation continues to tick up. Coupled with poor productivity growth, this means that stagnant growth will hit spending power of consumers en masse in the coming months, a point also raised by Big Four consulting firm Deloitte’s Passion for Leisure study earlier this year.

BDO Incides

In terms of long-term trends, inflation has reached levels last seen in 2012, following years of relative decline. Output has fallen sharply since a pickup in 2014, hitting levels seen between 2010 and 2013. Optimism remains relatively high, and considerably above levels in the years following the crisis. Employment, following a strong pickup in 2014-15, has fallen somewhat – although it remains well above levels seen during the deep point of the financial crisis.

Commenting on the findings, Peter Hemington, Partner, BDO, said: “Business activity in the UK’s services sector is definitely slowing down, with many blaming this on the snap election. But the downward trend is clearly much more deeply rooted than this. Surprisingly, UK businesses remain optimistic about the future, but an immediate recovery seems unlikely.”


UK manufacturing sees orders slow amid Brexit anxiety

11 April 2019

Manufacturing in the UK saw negative growth for the end of 2018, reflecting a wider slowdown in the UK economy to 0.2% for the quarter, followed by three months at the start of 2019 which saw continued softening in orders. With uncertainty still hitting the sector ahead of Brexit’s deferred deadline, the industry faces a difficult 2019.

Despite a perpetually changing economic landscape, manufacturing remains a keystone industry in the UK. Optimism in the industry has been riding high in recent years, reflecting the perceived potential of automotive technologies, but last year saw a slight dip in business performance, ahead of what seems set to be a turbulent period for British manufacturing. Ordinarily, the sector might have expected to recover its footing relatively quickly, but with the looming spectre of Brexit making the economy’s future completely uncertain, this has not been the case.

The uncertainties of Brexit have continued to create headaches for companies on both sides of the channel. As contingency planning continues, new analysis from BDO and the Make UK explores how manufacturing – a segment likely to be hard hit by Brexit – has fared in the final quarter of 2018.

Output balance stable

Manufacturing remains a key industry in the UK, generating around 10% of total economic output and supporting around 2.7 million jobs. Yet while the industry has seen a number of years of strong optimism as well as demand, Brexit is set to throw a spanner in the works, with a range of manufacturing companies leaving the UK, or considering it. Indeed, UK manufacturing’s output currently sits at a 15-month low as the industry anticipates a cliff edge Brexit.

In terms of growth for various parts of the UK economy, a slowdown was noted in the final quarter of 2018 compared to Q4 2017. Manufacturing, in particular, saw growth declines coming in at almost -1%, with a similar trend in production. Construction saw a sharp contraction, falling 2 percentage points to below 0% growth in December 2018. Only services managed to have positive % growth in the final quarter. The final quarter as a whole saw growth of 0.2% in the UK economy – the lowest level in six years.

Output across most sectors in the industry remains positive, with the percentage balance of change in output at 22%. The result is the tension quarter of positive percentage balance of change, with stagnation on the final quarter of 2018. The firm is projecting a slight softening of output going into Q2 2019. The firm notes that there is some stockpiling taking place, with orders and outputs unaligned going into 2019.

Order balance remains positive but dips further

While there is a broadly positive picture for output, the firm does note considerable differences between subsectors. Basic metals for instance, saw a net 24% fall to -18% over the past three months. Metal production is also seeing relatively poor performance as demand from the automotive industry enters a period of acute uncertainty. However, most industries are to see improved output on balance, with rubber & plastic increasing from a net 11% to net 56%.

Export trade

Having been buoyed by the lowered value of the pound, UK export orders are up slightly on the previous quarter, but remain well below the most recent peak in Q3 2018. Domestic orders were relatively strong, with a year between the most recent peaks for the segment. However, Q2 2019 looks to see domestic orders fall sharply, to half Q1’s result, while export orders too are set to see declines.

The decline reflects a decrease in basic metals, possibly a reflection of changes affecting the auto industry. Meanwhile, export orders are down due to Brexit cross-border uncertainty – the effect of the sterling devaluation unable to continue to buoy the market. Basic metals and metal products are both in negative territory for the coming three months.

Investment and employment intentions

UK employment figures reached new milestones, with total unemployment down to 3.9% while participation rates hit record highs. Employment planning continues to be in net positive territory, with a net positive balance of 22% in Q1 2019. The coming months are projected to see a slight dip, again, largely resultant from uncertainties around Brexit. Basic metals is the sector most likely to see a negative trend, reflecting the expected decline in orders.

Investment intentions meanwhile continue to be in positive territory. However, again, the now acute uncertainty about Brexit – the UK government has boxed itself into a corner – mean that confidence around investment could wane rapidly.

Commenting on the wider economy, Peter Hemington, a Partner at BDO, said, “Manufacturing firms have been ramping up their preparations for a disorderly Brexit, in large part through the stockpiling of imported goods. This has had the effect of inflating activity levels… It’s too late to do anything about this now.  But a disorderly Brexit would be far worse than the current relatively mild slowdown, possibly disastrously so… We are concerned it looks more likely than ever that we will exit the EU without a deal.”