Manufacturing outlook after Brexit

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Our quarterly Manufacturing Outlook survey, in partnership with BDO LLP, shows manufacturers’ confidence about trading conditions for their business performance has picked up from the post-referendum lows as exports out-perform expectations. But concerns about UK growth and domestic demand linger on into the second half of the year.

What’s been happening in manufacturing?

Funny you should ask, we’ve just published a new survey about that.

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Business conditions in manufacturing are a bit mixed at the moment. In the past three months the balance of companies reporting a fall in output has deteriorated a bit compared to the previous three month period and new order intake was also stuck in negative territory for the fifth quarter running. On both counts this was a bit worse than companies had been expecting, but not radically different from the trading conditions that have been recorded by our survey since the start of this year.

The good news is that export sales beat expectations this quarter and the improving trend is forecast to accelerate by the end of the year. Overall output balances are forecast to pick up too in the next three months. Together this has shored up confidence amongst manufacturers about their own growth outlook for the next 12 months.

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What about Brexit – didn’t that make everything worse?

In July, when we took the temperature of the sector immediately after the referendum, confidence had crashed. The surprise result and political upheaval rattled businesses and consumers, but companies hadn’t noted a major change in their customers’ behaviour.

That seems to still be the case with conditions still in the subdued state they’ve been in since the start of the year and the expected improvement delayed rather than derailed. But manufacturers are still relatively downbeat about the prospects for the UK economy over the next year, with the big unanswered questions about Brexit are still casting a bit of a shadow over the UK’s growth outlook.

Some sectors seem to be taking this harder than others. We see some poor sentiment indicators coming from the construction sector this year – including most recently the PMI and a European Commission confidence survey for the sector. The weakness is mirrored in some related manufacturing sub-sectors, such as rubber & plastics, metals and non-metallic minerals. Manufacturers of investment goods also saw their UK orders balances drop further into the red as they face concerns about possible delays or cutbacks to capex plans.

OK, back to the good news then. Is the export surge because of the exchange rate?

Yes, the good news. So, Sterling is still down against the dollar and euro by around 7% compared with pre-referendum levels, undoubtedly providing a boost for exporters. But as you can see the sector impact is patchy and we don’t think the bounce is entirely exchange rate driven. For example, electronics and electrical equipment have been expecting the pick-up in export sales following increasing signs of improving demand from a range of overseas markets, even before the sharp fall in Sterling.

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While we’re on the exchange rate, the weaker pound is also pushed up input prices (as we know from official data) and therefore squeezing profit margins in the past three months. But pricing looks set to catch up with prices on UK sales forecast to rise in the next three months.

If export growth is set to return, that’s good for helping to rebalance growth, right? An investment rebound would be the icing on the cake – any chance?

Erm, no. Investment intentions in our survey have been negative since the end of last year and balances have been getting worse each quarter since. At -10% this quarter, the investment balances are stuck in territory last seen at the end of the 08/09 financial crisis. This isn’t surprising, as one manufacturer mentioned earlier this week, pressing ahead with a new capacity investment in the UK feels somewhat risky without knowing what the trading relationship with major customers in the EU will look like in the long term. Manufacturers’ responses also back up forecasters’ expectations (including us and the Bank of England) that business investment is likely to slide over the next 18 months.

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However, employment growth could pick up before the year is out and companies recruitment plans moved back into the black. The improvement in export orders may have driven the need for a bit more capacity, which firms will look to meet with additional employees.

OK, there’s a lot going on then – sum this up for us…

Good point. Manufacturers will think the UK economy is in for some Brexit related challenges in the year ahead, but are feeling a bit more upbeat about their own ability to grow, given the UK hasn’t left the EU (yet) and export orders are picking up. But I would stress that this is playing out differently in different manufacturing sub-sectors.   

Nevertheless, companies are not so upbeat that we’ll see a lot of new capital expenditure unleashed.

Perhaps some forecasts will also help complete the picture. We expect the UK economy to grow by 1.7% this year, but that will slip back to 0.8% in 2016. Manufacturing will also grow in 2016 – thanks to a stonking q2, but recession is our central forecast for next year with output falling by 0.7%. 

 

Download our latest Manufacturing Outlook Q3 for the full details.

 

 

 

 

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Chief Economist

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