Manufacturing recovering from Brexit shock but caution advised

Despite strong manufacturing production results from August, the industry still remains cautious about its post-Brexit future, with investment intentions remaining low. 

According to a study published by the manufacturers’ organisation EEF in collaboration with public accounting firm BDO, the post-Brexit referendum recovery remains fragile.

“Manufacturers’ confidence collapsed in the aftermath of the referendum, but our latest survey provides some relief that this has corrected,” said Lee Hopley, chief economist at EEF.

“Signs of an export revival are helping to drive more optimism about activity in the second half of the year, but concerns about whether the UK economy can shrug off post-referendum challenges is clearly evident.”

EEF expects that some sectors, notably construction and investment goods, may be hit harder than others.

The EEF called for the UK government to put in place an industrial strategy that would ease the investment anxiety. This, the organisation said, would become even more critical once negotiations to leave the EU begin and Article 50 is activated.

However, the organisation expressed confidence manufacturing may return to stronger growth by the end of 2016.

“While the outlook for the UK economy remains uncertain, manufacturers are more confident about their own business performance,” said Tom Lawton, Partner and Head at BDO Manufacturing.

“This shows they believe there is a positive way forward from here and that Brexit might not have been the portent of recession. Some sectors are clearly facing longer term structural challenges where global factors are at play and these are unlikely to abate anytime soon.”

Reviewing data for the past three months, the survey found that manufacturing output went into reverse, with the balance dropping to -7 per cent from -4 per cent in Q2. The mechanical equipment sector suffered the most pronounced decline on the back of poor investment intentions and the cutbacks in the oil and gas sector.

Order intake also disappointed in the past three months, deteriorating slightly to -4 per cent from -2 per cent, with all sectors under-performing against expectations. Mechanical equipment experienced a record 17 per cent decline. The uncertain demand in the UK economy was reflected in a balance of –9 per cent in the last three months and although the balance for the next three months has moved into positive territory to +4 per cent, the domestic outlook remains uncertain, said EEF.

In contrast, however, export orders have exceeded expectations moving into positive territory in the last quarter to +2 per cent, the highest balance since the second quarter of 2014. The increase has been largely driven by the drop in the value of the pound in the wake of the referendum results. Orders from the EU were particularly strong with the greatest increase seen in the electronics and electrical equipment sectors. The outlook for these sectors for the fourth quarter of 2016 seems largely optimistic. On the contrary, mechanical equipment as well as basic metals production are likely to remain struggling.

Although recruitment has fallen to – 5 per cent, companies expect to start hiring soon and an 8 per cent increase is predicted for the fourth quarter. Investment prospects continued to deteriorate, down for the fourth consecutive quarter to -10 per cent from -9 per cent.

Although the pound’s depreciation proved beneficial for exports, it led to increased input costs for manufacturers and reduced profit margins. However, the EEF expects price pressures to ease in the final quarter as UK prices turned positive for the first time since the fourth quarter of 2015.

Forecasts for manufacturing output have been revised up to 0.4 per cent in 2016 (from -0.3 per cent in July) and -0.7 per cent in 2017 (from -1.1 per cent).

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