The Q1 Manufacturing Outlook survey of 306 companies (surveyed before the current escalation in coronavirus cases) published by Make UK and business advisory firm BDO LLP, taken before the recent escalation of the economic situation, confirms that the sector had ground to a standstill at the end of 2019 as the stockpiles from a potential October EU exit wound down. And, while the domestic picture had begun to improve slightly, exports had already fallen sharply in response to a downturn in world trade, a situation likely to be exacerbated by current events.
In addition, a separate snap poll of companies conducted by Make UK showed that over a third of companies (36%) say EU customer sentiment has worsened since exiting the EU, indicating European customers are now looking away from the UK, further threatening exports to the UK’s major market. Just 2.9% of those surveyed said there had been a positive change.
Make UK and BDO warned the true impact of coronavirus may not yet have been recorded but the next few weeks should shed some light on how the sector is responding to disruptions that are set to send shockwaves through industry supply chains.
Seamus Nevin, Chief Economist at Make UK, said: “After the rollercoaster ride of the last twelve months and a series of stockpiling highs and investment lows the election result had at least provided some degree of political certainty and a prospect of a return to cyclical economic normality, but the escalation of coronavirus is likely to knock that off course.
“Even before the current situation the shocking drop in exports could not have come at a worse time ahead of potentially difficult trade talks where the clock is running down fast. It is now vital that Government works with industry to limit the damage to industry and take whatever steps are necessary to safeguard skills in particular.”
| Comment from Geoff Webb, VP of strategy at PROS: While Brexit certainly feels like a unique, and dramatic event for businesses in the UK, it is also a harbinger of the future and, perversely, represents a clarion call for businesses to embrace an accelerating pace of change. Businesses that weather Brexit will do so because they are already preparing for the type of global business economic environment that will be the norm in the future; one in which agility and resilience to rapid shifts in buyer and regulatory landscape will be the new defining characteristics of growth and success. Such a business landscape is defined now by rapid changes in tariffs, swings in political opinion, and disruption from new entrants in highly global markets. Manufacturing businesses tend to feel the pain of these rapid changes most acutely because they must manage so many move parts, both literally and figuratively, and are therefore vulnerable to global disruptions and economic swings, especially those that can arise quickly from political and social changes. The successful manufacturing businesses of the future will have adopted a set of technologies, processes, and ultimately culture, that enable them to be very reactive to changes, and indeed proactively drive disruption in their markets where opportunity arises. Today much of these technologies are bundled up in the buzzword-heavy world of “digital transformation”, but business leaders shouldn’t be put off by the hype. Successful manufacturers are already adopting and adapting technology to make them faster and more nimble in the face of rapid market shifts as well as adopting and fostering a culture of constant innovation and appetite for change and disruption. Surprisingly for such a traditional set of industries, technology such as AI is now playing a significant role in helping business leaders navigate the shifting currents of global events like Brexit, the escalating trade war between the US and China, and changing customer and buyer expectations. Such AI technology is actively employed to evaluate the impact of tax changes, tariffs, competitive activity, and changing buyer demands. It is used to offer core business advice such as the right product mix to offer to buyers, and how to correctly price each and every transaction to both win business and maximize revenue. While the pain of Brexit is acute today, businesses that embrace the changes necessary to weather it will actually be better position than others in the global market to compete, and ultimately win. It’s pain, but there’s also gain. |
Tom Lawton, head of manufacturing at BDO, added: “As coronavirus fears take hold and the impact on the sector’s crucial supply chains remains largely unknown, businesses should be preparing themselves for more volatility this year.
“The dramatic fall in exports only exacerbates the challenges to come. There is no doubt that the sector needs the Government to step up and deliver a clear and supportive industrial strategy to help navigate the choppy waters ahead.”
According to the Make UK/BDO survey, total orders improved from +1% in Q4 2019 to +4% in Q1, though to put this in perspective this compares to the turbocharged performance of manufacturing in 2017 which peaked at +37%.
Total orders in Q1 (up to +4% from +1%) reflect the slightly improved picture for domestic orders, although they have still remained negative for three successive quarters which is the worst run since 2015 (-3% from -5%). This contrasts with the picture for export orders which deteriorated significantly from +10% to -2%, the first time export orders have been negative since the final quarter of 2016.
The weakness of the order picture coupled with the unwinding of stockpiling which took place last Autumn meant output fell to just +2% from +11%. By sector, the continuing difficult situation affecting the steel industry meant basic metals output fell by a balance of -29%, whilst the effect of the coronavirus on access to semi-conductors and other components is starting to impact on the electronics sector with a balance of -5%, the first negative balance for the sector since Q4 2015.
Northern Ireland had the lowest level of business confidence, reflecting the uncertainty over future trading arrangements given its exposure to the EU and the fact that manufacturing is a higher than average percentage of the Northern Ireland economy (15.2% compared to 10.1% UK overall).
Make UK is forecasting manufacturing output to fall by -2.1% in 2020 (downgraded from 0.3%) though this may be revised further in the light of the current situation and to grow by an anaemic 1.1% in 2021. GDP is forecast to be 0.7% in 2020 and 1.8% in 2021.
