Falling demand sees UK manufacturing confidence stumble

01 October 2018 Consultancy.uk

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.

Optimism about UK outlook inches higher

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.

Output balance trending downSmaller 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.

Positive order balanceAs 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.


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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.”