While manufacturers remain focused on delivering long-term growth strategies and are fairly positive about their own performance in 2017, they still have risks firmly on their radar. This year 46% of companies see more risks than opportunities in 2017, a share that has been growing over the recent years.
Whilst some of the grey clouds hanging over the global economy are still unfolding, the UK’s decision to leave the EU has clearly exacerbated risks to manufacturers’ growth prospects, especially those associated with exchange rate movements.
Sterling movements are on top of manufacturers’ concerns
The plunge in sterling in the wake of the UK’s vote to leave the EU, along with a heightened day-to-day volatility since the referendum outcome, clearly exacerbated manufacturers’ concerns about exchange rate fluctuations. While this was previously seen as an important source of worry, this year 86% of manufacturers identified sterling movements as a source of risk in 2017, an all-time high in the survey’s six-year history.
As we highlighted in previous posts, the dive in sterling caused import prices to surge to multiyear highs, increasing production costs and thus taking its toll on manufacturers’ profit margins. Moreover, heightened volatility in the pound exchange rate complicates manufacturers’ pricing strategy at home and abroad. This explains the so far limited pass-through from the exchange rate depreciation into higher consumer price inflation.
Brexit has cast a shadow over manufacturers’ ties in the UK and abroad
Half of manufacturers in our survey fear a potential change in attitude from customers to UK sourcing. This reflects concerns about the potential impact of uncertainty surrounding the future relationship of the UK with the EU on the renewal of long term contracts. However, only 13% of companies expect this risk to pose the most significant threat to their business plan in 2017. Indeed, any changes to the current trade deal with the European bloc will not come into force in 2017, and manufacturers expect ongoing relationships to continue into the year ahead.
On the other hand, there are concerns about major customers relocating outside the UK, and one in three firms believe this would pose a risk to their company in 2017. This seems a worry across all sizes of firms, although large companies are the most cautious about the prospect of this.
Brexit apart, cash flow risks continue to be alive in 2017
Cash flow problems and changes in payment terms (normally extensions) were reported as a growing concern in recent years; and 2017 is no exception. Nearly half of firms in our survey (44%) mention it as a risk in the year ahead, with only a small proportion linking it to Brexit. This risk is more prevalent in the metals industry, with a fifth of companies in the sector citing it as the main source of worry in the year ahead.
Volatility in major markets remains a source of concern
Concerns about demand from overseas markets are not abating in the year ahead. Economic volatility in major markets continue to be a source of risk for two in three manufacturers going into 2017, and for a fifth of companies, this will pose the most significant risk to growth. This chimes with the weakness in world trade growth in recent years, which weakened further in 2016 to its lowest pace of change since the financial crisis. The trend is unlikely to reverse and companies expect this risk to continue dragging on export sales into 2017.
All in all, risks abound in the year ahead, heightened by mounting political uncertainties –not only in the UK but also in major partners. As a result, manufacturers’ confidence about the UK outlook took a step back this year, and the world economy provides no relief.