Manufacturing – a sector critical to the success of the UK economy

Immediately after the United Kingdom’s decision to leave the European Union (Brexit) the financial markets were hit and sterling fell sharply to a 30 year low but since then markets have started to calm. However, these are early days and Brexit and what it actually means to our trading relationship with the EU (and beyond) will continue to cause uncertainties for UK manufacturers.

Now six months on from the referendum how confident are UK manufacturers about their business prospects, performance and investment plans?

Activity on the up

The results from the latest EEF/BDO Manufacturing Outlook survey show confidence is on the up and this is being reflected in the rebound in activity with both output and orders returning to positive territory for the first time in six quarters. The improvements in trading conditions and confidence have led to manufacturers needing to increase capacity, taking on more people and increasing investment. After a year of constant decreasing investment intentions a return to positive balances is an encouraging turnaround.

Last quarter we saw export orders exceed expectations, reporting the highest balance since 2014 and surprisingly this quarter it is the only indicator showing a negative balance. However, with the reported increases in demand from Europe and North America and the weak exchange rate, there are expectations that export orders will pick up next quarter and drive momentum in 2017.

Competitiveness increases but costs being pushed up

The sterling’s depreciation will make exports cheaper, making British products more competitively priced and attractive to international markets. However, this is putting additional pressure on manufacturers who rely heavily on imports for their raw materials, increasing production costs and ultimately profit margins are being squeezed further.

With inflationary pressures building, significant price rises are in the pipeline - a factor likely to weigh down on domestic activity in the year ahead.

A sector critical to the success of the UK economy

Contributing 10% of GVA – the UK manufacturing sector remains critical to the future success of the UK economy. Despite the uncertainty at home and abroad, it is promising to see manufacturers are pushing forward and adjusting their business plans to make the most of the opportunities available. Brexit means a period of challenge and vulnerability for the sector. Therefore, it’s important that the Government delivers a practical and robust industrial strategy that is focused on the needs of the manufacturing sector.