How Brexit uncertainty is weighing on UK manufacturing
Factory gates shutting for the last time; a vast steelworks teetering on bankruptcy; for sale signs hoisted over some of the grandest names in British industry.
Scenes like these that scarred communities in decades past are now coming back to haunt the UK, following a run of troubling developments at some of the country’s largest manufacturers that have left thousands of jobs on the line.
From British Steel’s collapse into insolvency and planned closures by Honda and Ford, through to Bombardier putting its Belfast aerospace operations on the block, there are fears that UK manufacturing is about to enter a period of decline akin to the 1980s, when the laissez-faire policies of Margaret Thatcher’s Conservative government allowed ailing industries to shrink or fold.
“I’m not sure there’s a common fundamental thread, but I think there could be some trouble brewing for the sector,” said Tim Lawrence of PA Consulting, which advises companies. “The biggest risk is the uncertainty for the UK sector around Brexit — the impact that’s having on investment in the sector and [on] productivity.”
A no-deal departure from the EU, resulting in tariffs and customs checks, would be a serious problem for many manufacturers, who rely on frictionless trade to source components and export goods. The French owner of Vauxhall, PSA, has warned it will pull all production from Ellesmere Port if Brexit renders the plant unprofitable.
Uncertainty around the divorce is already taking a toll.
UK manufacturing output witnessed its sharpest monthly slump since 2002 in April — a drop of 4.1 per cent — as carmakers implemented maintenance shutdowns to coincide with the original departure date of March 29, and so avoid any hold-ups at borders.
Even an increase in production the following month as auto plants switched back on was not enough to recover the losses.
The drop in manufacturing activity follows a rapid build-up of raw materials, components and finished goods by factories earlier this year on fears of Britain crashing out of the EU without an accord. With inventories to run down, customers are placing fewer orders.
As a result of the unprecedented stockpiling in the first quarter, many smaller and medium-sized manufacturers are now struggling for cash, according to the trade body Make UK.
“It’s quite clear there’s a lot of firms really struggling and a number have had their backs to the wall,” said Seamus Nevin, Make UK’s chief economist.
“More are saying if things continue they’ll go out of business. There’s been a significant number of job losses. It’s quite clear the sector as a whole is going through a very turbulent period.”
The UK is not alone. Weakening global demand and US President Donald Trump’s trade war are weighing on other large economies. Manufacturing activity has contracted in Germany and China, while growth has rapidly decelerated in the US.
There could be harder times ahead for British factories. Economists have forecast an increase of just 0.8 per cent in manufacturing output this year, decreasing to 0.6 per cent in 2020, compared with already low predictions of growth in the overall economy of 1.3 per cent in 2019 and 1.4 per cent in 2020.
The dim outlook comes as UK manufacturing still languishes below the level seen before the 2008 global financial crisis. While the service sector and construction are up by 17 per cent and 14 per cent respectively on their pre-recession peak, manufacturing is down by 0.7 per cent.
The manufacturing sector has broadly held its share of the economy over the past decade, at about 10 per cent of gross value added. But that is well below the 23 per cent of GVA that Mrs Thatcher inherited in 1979, or even the 17 per cent when Labour came to power in 1997. Following a shift away from low-cost mass production towards more advanced and precision activities, Britain is today the ninth largest manufacturing nation in the world.
Most expansion in the sector since the recession has been in four areas: transport equipment, such as trains, planes and ships; motor vehicles; food; and the repair of machinery, according to the Office for National Statistics. The steepest drops have been in pharmaceuticals, machinery, printing and recorded media; basic metals and fabricated metal products.
Aside from food, which tends to be stable and more in line with consumer spending, the worry is that these engines of growth are now stalling.
Thomas Pugh, an economist at Capital Economics, said that while some of the headwinds buffeting UK manufacturing were temporary or cyclical, others are likely to be more permanent and “drag on the industry for a long time yet”.
“We doubt that the manufacturing sector is going to have any sort of revival until 2021 when global growth starts to pick back up,” he added.
Also, although Brexit may have dealt the decisive blow in some high-profile manufacturing casualties, there are deeper forces at play in certain industries.
British Steel’s woes were triggered by Brussels suspending the award of carbon credits to UK companies and a fall in orders because of Brexit confusion. But decades of under-investment, compounded by Britain’s relatively high industrial energy prices and cheap imports, had already left it vulnerable.
Following a revival in British carmaking that almost returned the industry to its past glories, vehicle production had begun to fall even before the temporary closures. While car sales are tipped to drop globally this year, UK automakers were exposed to the backlash against diesel, which has suffered in the wake of the VW emissions scandal.
Bombardier’s decision to offload its Northern Ireland business that makes aircraft components such as wings and fuselages was partly down to the Canadian group’s failed attempt to break the dominance of rivals Boeing and Airbus in the market for narrow-body jets.
Despite being a star performer of the economy in recent times, aerospace production decreased last year, only the second time since 2008, according to the ONS.
One reason for optimism came this month when Jaguar Land Rover said it would spend close to £1bn building electric vehicles in Britain.
Yet there are signs that foundations are not being laid for the future. Fewer manufacturing companies are achieving high growth and the number of start-ups in the sector has dropped, according to a study by Aston University.
“The risk is if we don’t invest in all this technological development going on . . . then our competitiveness in the next 10 years will be markedly reduced, which could lead to an eventual reduction in our ability to compete on a global basis,” said Mr Lawrence of PA Consulting.