Falling demand sees UK manufacturing confidence stumble

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 new analysis shows a slight dip in business performance, ahead of what seems set to be a turbulent period for British manufacturing.

Even in light of uncertainty around current and future market conditions – as the UK edges towards an as-yet undetermined Brexit – while productivity remains slow at best, manufacturing companies operating in the UK have remained relatively positive. This positivity is not unconditionally paralleled by the workforce, a growing portion of which faces layoffs relating to automation or companies relocating to mainland Europe, however bosses at least have been buoyed by an export boom driven by the devalued pound.

Now though, following a first half of 2018 hampered by extreme weather conditions, in which domestic sales in retail outlets have floundered continuously, manufacturing has taken a knock in its own right. Declining high-street sales have had a ripple effect further down the supply chain, impacting on the revenues of manufactures, some of which have faced collapse as a result. New analysis from auditing and advisory firm BDO has explored the key trends in the manufacturing industry, as it prepares for a make-or-break period.

Broad confidence

Opinions on the performance of the broader economy and the individual businesses of manufacturing executives contrast, to a minor extent. Following recent ups and downs, confidence in the general UK economy has improved slightly. At the same time, confidence around business performance – which has tracked considerably higher than economic confidence since the referendum – has declined slightly, with the gap between the two closing.

On top of a troublesome retail outlook, the relative stagnation of both results reflects a slowdown in the construction segment, which impacted on the construction supply chain. A harsh winter followed by a record heat-wave slowed a number of major projects, while capital equipment demand softened following a recent boom, as domestic demand ebbs away as part of an international trend. The high-profile administration of construction outsourcer Carillion also took a major toll on manufacturing in this regard, as a number of firms in the company’s supply chain suffered from the aftershocks of its collapse.

Demand in construction could recover, according to the study from British construction consultancy Mace, if the industry modernises its methods. Doing so could make the UK a world leader in the $8 trillion global construction industry, creating a near £40 billion a year export market for the country, and addressing a portion of the UK’s housing crisis in the process.

Output declines

When BDO examined the output of UK manufacturers, it found on balance, that it was in a state of decline. Poor productivity has already seen the UK’s economic growth slow to its lowest rate since 2012. In that year, the Office for National Statistics confirmed the UK economy had returned to recession, after shrinking by 0.3% in the final quarter of 2011, before falling a further 0.2% in the first three months of 2012.

A recession is defined as two consecutive quarters of contraction, and that particular retraction was blamed upon a sharp fall in construction output and wage stagnation which stifled consumer demand. The figures relating to the current rate of output in construction and manufacturing will be of particular concern in that case. While, on net balance, the researchers found that 26% of manufacturers saw output improve at the start of 2018, this actually represents an 8% tumble from the previously recorded 34%. Manufacturers do not expect this to fall further in the coming three months; however they do not anticipate an improvement either.

Smaller companies have seen the strongest net positive change, with revenues from £0-9 million recording 30% net positive change, while those above £25 million came in at 22%. Larger companies are expecting the coming months to boost their figures significantly, in juxtaposition to small companies. Basic metals and metal products each recorded higher than 30% growth, with both segments also expecting solid growth going forward.

Exports retain importance

BDO’s research suggests export orders continue to have a relatively strong showing, at a net 20% for the second quarter of the year. However, they have fallen dramatically from the start of the year, while domestic orders also declined by around half between Q1 and Q2. Economic growth had to an extent been buoyed by the lower value of the pound, incentivising global investors to buy British products at bargain prices – however that activity has cooled dramatically in 2018.

Consumer sentiment continues to impact demand, which in turn factors into orders – with domestic order net positivity falling from 21% to 9%. At the same time, low orders from the construction industry were cited as a key driver for order decreases.

As the prospect of a cliff-edge withdrawal from the EU threatens to impact on the ease by which UK-based supply chains can sell goods to mainland Europe, manufacturer exports have been hampered by the continuing haze of confusion surrounding what 2019 holds. While to an extent, UK orders are expected to strengthen in the coming three months, at 15% net positive UK orders, exports are expected to see another smaller decline, according to respondents of BDO’s poll.

Commenting on the results, Tom Lawton, Partner and Head of BDO Manufacturing, said, "Following a record breaking 2017 and a strong start to 2018, we are starting to see the impacts of the on-going political and economic uncertainty on the UK manufacturing sector. However, despite the sector's slowing performance this quarter, manufacturers - which are the economic engine of the UK economy – still remain cautiously optimistic about the future."

Following this decline in confidence, British manufacturers have also been found to be pulling back sharply on their investment plans. Only one-third of companies said they planned to increase their investment in plant and machinery – representing a record low in the fifth annual survey carried out by the EEF manufacturer's body in collaboration with Santander Bank. This trend was especially visible among small companies, with three-quarters saying they were to scaling back spending plans in the coming two years.