UK manufacturers concerned for future amid consumer squeeze fears

12 January 2018 Consultancy.uk

UK manufacturers across the world are positive about current business conditions, as export orders rise on improving global demand, a new study has revealed. However, while investment intentions have grown, as demand, particularly from export in Europe, continue to improve the sector’s sentiment, the UK market remains concerned, as a continued squeeze on consumer pay packets threaten to reduce consumption.

The UK economy has come under increasing strain ever since a national referendum in 2016 signalled Britain’s desire to leave the EU. A new report has explored how well the manufacturing business community is reacting to current macroeconomic conditions compared to the global market, and has compared their confidence going forward. This includes uncertainties that still surround turbulent Brexit negotiations and stagnant UK wages.

The BDO and European Economic Forum report showed that the business community’s overall confidence is relatively robust. This is the case across most key regions in the UK, outpacing, in almost all instances, the wider economic outlook. Wales currently boasts the highest economic and business confidence, obtaining close to an eight out of ten in both metrics featured in BDO’s study.

Elsewhere, the North East maintains a positive business outlook of seven, although its wider UK economic outlook comes in a point lower on six. The study suggests that the West Midlands and South East & London also remain bullish, at around seven, although the former has wider concerns around the outlook of the UK economy over the next 12 months. Contrastingly, Scotland and York & Humber showed relatively low confidence on both fronts.UK economic outlookThe UK economic outlook as a whole comes in at an average of six out of ten, while business confidence scores a higher average of seven. This highlights certain disconnect between businesses’ current situations, and their anticipation of wider economic conditions, and implies an uncertainty about the future, both during Brexit negotiations – which finally move to their second phase in 2018 – and beyond.

A global pickup in economic growth over the previous year, as well as the lower pound rate, is positively affecting order growth for manufacturers at present. The first quarter of 2016 saw both domestic and export balance of change in orders rise sharply, the former by around 25% and the latter close to 30%. The following period has seen improvement in export orders, at around 35% and 45%. Domestic orders have been more subdued however, growing at between 10-20% per quarter. The projections for the first quarter of 2018 stand at around 20% for both domestic and export.

Different segments have experienced a widely varied change in order volumes, with sector specific conditions, such as current slowdown in construction activity affecting the supply chain, but possible increases in demand for public housing programmes, creating room for future confidence in the sector. The relatively low rise in domestic orders, meanwhile, could reflect wider uncertainty in the UK economic environment, as consumers face a squeeze on their finances from real wage decline, as inflation outpaces pay rises.

Future intent

Investment intentions are on the rise, according to the analysis, following a period of decline on balance during much of 2016. The pickup in investment seems to be partially the result of improvement in the global economic picture, with capital goods emerging as one of the largest segments to see gains, while the latest quarter of economic performance showed the highest net balance of investment intention.

Employment intention has, meanwhile, decreased slightly over the past two quarters. The firm suggests that the relative impact of lower consumer spending in the consumer sector has affected the sectors’ hiring intention in the recent quarters.The research also suggests that price increases are on the horizon, with the percentage change on balance increasing more than 10 percentage points to 25%; export prices too, are projected to see increases as input costs priced into goods. The increase in prices reflects a rise in commodity prices, particularly oil, with the rise of oil and other key precursor commodity prices likely to see prices increase over the coming three-month period.

Commenting on the industry outcome, and its future in the face of Brexit, Tom Lawton, Partner and Head, BDO Manufacturing, said, “Manufacturers have continued their strong performance into the final quarter of 2017, ending the year with plenty of festive cheer. The sector’s performance is being driven by increasing demand from around the world, in particular Europe. The task of government is very clear: it needs to deliver a Brexit that minimises disruption to manufacturers – they are the economic engine of the UK economy.”

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UK manufacturing sees orders slow amid Brexit anxiety

11 April 2019 Consultancy.uk

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.”