In January 2018, UK’s manufacturing output was at its highest in ten years. According to the facts and figures published by the EEF The Manufacturers’ Organisation and Santander, Britain was the 8th largest industrial nation with $249 billion of annual output.
In August 2018, Britain has slipped back in rankings to number 9, behind France. This is after the sector saw the biggest fall of 6 years in April 2018 – 1.4%. So, what is the reason for the fall in output for factories in Britain? Some of the key factors responsible for the dip are as follows:
1) Uncertainty surrounding Brexit
The uncertainty surrounding the type of Brexit deal has had a major impact on the UK manufacturing sector. The sector may lose access to some critical markets, it may become difficult for companies to access talent and labour at cheap costs, manufacturers may need to deal with a new set of regulations, and increased tariffs can hurt its overall competitiveness. The lack of clarity in this area has led to delays in major decisions by manufacturing companies.
2) Delayed investment decisions
The aftershocks of the 2008 recession continue to be felt in the manufacturing sector today. As PWC’s Annual Manufacturing Report states, “Record low interest rates and new cash gushing into the system through quantitative easing should have unleashed a veritable torrent of new investment in UK manufacturing. And yet, as we know, this simply didn’t happen.” This, in turn, impacts the industry’s ability to invest in capex or digital initiatives.
3) A weaker pound
The weakening of pound also contributed to the slowdown in manufacturing growth – while the weak pound could theoretically help boost exports as the cost of goods decreases for foreign buyers, it also contributed to the rise in production costs. As the manufacturing sector imports a large portion of materials from overseas suppliers, the increase in production costs outweigh any benefits from the lower cost of finished goods.
What does the future hold?
The key factors that are currently impacting the manufacturing sector – fear of Brexit, delay in investments and a weaker pound – are likely to hang over as a cloud over the sector for the coming months. A research paper exploring the impact of various Brexit deals paints a bleak picture. Any of the potential deals will lead to a fall in exports to EU countries. In addition, as the UK may not be seen as the gateway to EU following Brexit, the number of future investments may dwindle.
On the other hand, manufacturing firms in the UK have the opportunity to expand into the EU, leverage digital innovation to improve productivity, and reshuffle supply lines and benefit from a weaker pound to increase competitiveness in the global market.
There’s no doubt the UK manufacturing sector will have to weather some storms in the coming months; however, innovative and agile manufactures have the opportunity to turn the situation to their advantage.