IHS Markit UK Manufacturing PMI data for June was published today (2 July) and showed a slight increase in the index to 54.4 which was an increase of 0.1 from the May index. This marginal output increase was fuelled by firms reducing work backlogs at the fastest rate since the summer of 2016 and building inventory levels to cater for potential supply issues that may arise the UK exit from the EU on 29 March 2019. New business from export orders have crystallised and employment in the industry has increased the most since March this year.
However, output growth has eased further and business confidence is at a 7 month low. The causes behind this lack of optimism are the stalled Brexit negotiations with a hard Brexit becoming an increasing reality, rising input prices, the impact of tariffs if no deal is accomplished and, allied to this, the increasing productivity gap in the UK manufacturing industry.
Alongside this sobering outlook are the media reports and discussion regarding car and aircraft parts manufacturers in the UK considering relocating their operations to within the EU with the allied risk of major job losses in both industries. The car industry employs approximately 1 million workers either directly and in allied businesses. The aircraft parts manufacturers have approximately 25 factories across the UK with 15,000 directly employed workers and allied businesses accounting for a further 100,000 workers. Immediate losses of jobs in both these industries would be catastrophic for the economy and ultimately for UK worker living standards.
However, both BMW and Nissan are unlikely to immediately move operations from the UK to Europe following Brexit on 29 March 2019 as both car manufacturers have too much invested in the UK to close down operations entirely. The same applies to Airbus who, although are outspoken regarding the dangers of the continuing uncertainty regarding the UK exit from the UK, is also heavily committed investment wise in the UK.
This may give some comfort to the UK economy over the short to perhaps medium term but will these firms be researching and developing new models and product and employing thousands of UK workers in 10 years time?
The car manufacturing industry must convert existing internal combustion engines into hybrid and electric cars. Jaguar Land Rover is developing its first electric car in Austria. Will the company retool its Midlands plant from diesel to electric? With the current oversupply, the global slow down and with the increasing uncertainties mentioned above, the belief is that a location will be limited to locations within the EU customs union.
The immediate reaction to today’s results within manufacturing sector is, on the face of it, rather gloomy. The hard results, if looked at in isolation, are somewhat pessimistic and downbeat. In addition, there are less than positive results coming out of the retail sector where major retail chains such as House of Fraser, Marks and Spencer and Debenhams looking to reduce high street premises, the failures of Toys R Us and Maplins do not paint a pretty picture for the UK economy.
However, the UK manufacturing economy should be contrasted with manufacturing countries in the EU, where both France and Germany have shown decreased manufacturing outputs in the month of June, together with the US who have shown similar trends in output.
Immediate job losses in the car and aircraft industries seem some way off and therefore could buy the UK government time in striking a tariff-free, frictionless trading agreement with the EU, and in so doing utilising the strong UK history in engineering and design. The government needs to put aside individual differences and adopt a plan that benefits the nation as a whole and promotes prosperity for all. The UK are great innovators and developers of new technology and decision-makers must ensure that this expertise is fostered and maintained for future generations.
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