The UK’s decision to leave the European Union is forcing both politicians and manufacturers to contemplate a post-Brexit world built on new political and economic relationships. The full ramifications of the UK’s changing place in world trade are far from clear.
All that is guaranteed is change – a process that those who wanted to remain in the EU fear will destroy jobs and raise prices. Those who backed leaving, however, believe that the nation’s economy will thrive when unshackled from European red tape and bureaucracy. In some ways Brexit has already had a big influence on the export market, but in other are-as little has changed. Fears rose after the referendum, which, according to analyst firm IDC, saw confidence in manufacturing drop to a four-year low. But the depreciation of the pound provided a little relief. Sterling’s fall helped to boost export orders to a two-year high.
The EEF, the industry body for manufacturing employers, has stated that expectations for export orders continue to climb, spurred on by the weaker exchange rate as well as stronger demand signals coming from the US and emerging markets.
Positive export figures aren’t just down to the pound’s devaluation. EEF chief economist Lee Hopley has noted a couple of positive quarterly results from the export sector, with business surveys also painting an optimistic picture of demand. “I don’t think we can attribute every-thing to the exchange rate because it’s too soon to be seeing a change in volumes,” she says. “There were signs in the world economy that demand was picking up before the referendum. The US is still sucking in plenty of the world’s exports and we’ve seen tentative signs of recovery in European markets.
“The expectations were that it would start to gradually pick up this year and into next. I think that’s probably more important to the current export picture than anything else.”
But with Britain’s future dealings with the EU far from clear, a cloud of uncertainty hangs over the manufacturing sector. As a risk-averse market, most businesses are taking a “wait and see” stance until it becomes clear what cards the government plans to bring to the negotiating table.
We may learn more about the government’s plans from the Chancellor’s autumn statement this month, but its full intentions are unlikely to become clear until after article 50 is invoked. That is now expected to take place before the end of next March.
Lorenzo Veronesi, research manager at IDC, says: “Manufacturing is very conservative so businesses will probably avoid investing in the UK but they won’t want to dismantle what they’ve got here without seeing what the final situation will be.”
Hopley says: “In the short term, business as usual is the only option. A lot of orders will be based on long-term contracts or relationships and the ability to switch these on or off over-night is difficult.”
These relationships are still very much in place, but there are concerns as to what will hap-pen when it’s time for change. Hopley adds: “How will the UK manufacturer be viewed? European customers might go for a supplier that’s part of the EU. No decisions are being made on post-Brexit business arrangements, and that will lower levels of investment, be-cause you’re hitting the pause button.”
Jeremy Leonard, director of industry services at Oxford Economics, says: “We’re in a phoney war in the sense that something is going to happen, but we don’t know when or what. The result is businesses are taking a ‘wait and see’ attitude, which brings some negative consequences to the overall economy. They’re not investing. So suppliers lose business, lay people off and then those people spend less.”
Experts are making forecasts on how the export market may fare. “It depends on where you sit in the supply chain and what the sector is,” says Hopley. “Automotive and aerospace have long-term cycles so they have reasonably good visibility on production levels for maybe three to four years. Nothing’s probably going to change while a model’s in production. Then you have more commoditised sectors where the ability to switch supplier is easier.”
Fear of job losses
But good visibility in the automotive sector, which exports 80% of its products, doesn’t completely dispel fears. While we wait for answers, many multinationals warn that the wrong outcome could lead to plant closures. Factors key to these decisions include the future rules of access to the European single market, and how import and export tariffs may look.
According to the EEF, more than 80% of UK manufacturers export to the EU, and almost three quarters of firms note that a 10% tariff on exports to the EU would have a negative impact. But analysts believe the UK will fundamentally remain strong and still be a global player even if their worst Brexit scenarios become reality.
“Our worst-case scenario suggests that GDP in 2030 will be about 4% smaller than if we hadn’t left,” says Leonard. “The UK is a very strong economy and separating from the EU won’t kill it, just perhaps make us a little bit poorer in relative terms.”
But with Brexit will come new exporting opportunities outside the EU. According to the EEF, this could support jobs, growth and wealth generation in the UK. The organisation’s report, Britain and the EU: Manufacturing an Orderly Exit, highlights that only two in 10 manufacturers are not interested in taking advantage of this opportunity.
“This could be a silver lining,” says Leonard. “The UK’s trade exposure to the US is greater than it is for most European countries. That’s one of the reasons the UK economy has been doing relatively better than Europe.
“We think the US is going to grow faster than Europe for the foreseeable future, so if there was a way to boost that trade share it could be a compensating effect.”
The EEF says that the US, Canada, India and China are at the top of manufacturers’ exporting wish lists. And, according to Oxford Economics, by 2025 China will be the UK’s second-largest export market, with India in seventh place. The share of UK exports sent to emerging markets will be near 40%.
Looking forward, UK manufacturing needs to focus on its strengths, which include high-quality goods. Leonard says: “Machine tools is one sector where there’s good reason to think the UK will maintain its competitiveness, because there’s not the expertise to manufacture them elsewhere. Precision, test and measurement, sensors: applications where security and precision are essential are where the UK could excel.”
Another aspect is to focus on adding value, says Veronesi of IDC: “Firms will be able to de-fine new relationships with their customers. How they retain this is more important than just the price they offer. They will be able to shape new value propositions compelling to the customer, linking more services to the product.”
UK plc will only get an idea of which sectors are most likely to come out on top after article 50 is invoked early next year. Until then the government’s negotiating tactics stay secret. The “hard/soft” Brexit question remains unanswered.
Whichever way the Brexit dice rolls there will be winners and losers. In the meantime, manufacturing is wisely adopting a cautious “business as usual” approach.