UK manufacturers concerned for future amid consumer squeeze fears

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.The 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.”