Manufacturing: Price and labour pressures fuelling inflation, is this temporary or is it a more long term and chronic?

The National Institute for Economic and Social Research’s recent survey has forecasted a 6.8% increase in UK GDP for 2021 which is more cautious than the forecasted growth of 7.25% made by the Bank Of England (BOE) in its recent monetary policy review. The BOE also forecasted that growth of 6% is achievable in 2022 and will return to more normal GDP growth of 1.5% in 2023. Furthermore, the UK is growing at the fastest rate in the G7. All very encouraging news and certainly one that should not be underplayed. However, there is always a but…

There has been much said across both at ground level amongst manufacturers and backed up by reports in the media that there is tremendous prices pressure across all costs of inputs ranging from semi-conductors affecting car and IT manufacturers, commodity prices mainly in the oil and metals industries and basic construction raw materials such as cement. These supply-side pressures are caused in some measure by increased border controls and admin caused by Brexit, the ongoing disruption under the COVID-19 pandemic and delays in raw materials caused by the Suez container ship debacle. First-hand accounts in the container industry indicate that sea freight container costs have trebled over the last year rising from $5,000-$6,000 to $18,000 per container.

Alongside raw material inputs is the labour supply and cost challenges that are not only affecting the manufacturing, construction and logistics sectors but also the services sector particularly in hospitality and leisure. These shortages are caused in main by EU workers particularly in hospitality, haulage and construction not returning to the UK due to new Brexit regulations. Furthermore, there are ongoing skills challenges in the manufacturing industry caused by an ageing workforce not be replaced by younger skilled employees and the essential failure of the apprentice scheme particularly in SME’s. There are approximately 60,000 job vacancies in the haulage industry causing pressure on companies to increase wage awards well above previous norms. Client feedback in this sector stating that 25% increases in pay awards will not keep drivers employed is a worrying factor in an industry where there is stiff competition and historically low margins. There are significant increases in job vacancies in the hotel, restaurant and pub industries which historically were filled by EU workers who are no longer coming to the UK combined with many incumbent UK employees in these industries seeking alternative employment due to the continuing uncertainty in this sector. The latest NHS  “pingdemic” causing over 500,000 employees forced to self-isolate has not aided the situation, although this issue is being slowly remedied and has fallen in the last week.

The inevitable effect of the above cost implications has not only caused falling margins for companies which hopefully can be passed on to the consumer but also a worrying rise in the inflation rate which the Bank of England (BOE) is expecting to rise to 4% by end of Q4, 2021, remaining at 4% in Q1 2022, gradually falling back to 2.5% by Q4 2022 and returning to the target of 2% by 2023. Indeed, the view of the BOE is that the current inflation is temporary and caused by frictional factors which are in their opinion are likely to return to expected norms by 2023. A bold statement that hinges on the fact that COVID-19 effects are soon to be over which may be misguided in view that China is already showing that COVID-19 is rearing its ugly head and the current immunity protection afforded by the Sinovac booster may be ineffective against the latest strains? Secondly, not all nations have been as successful in dealing with vaccine sourcing and inoculation as in the UK. Furthermore, the BOE is also forecasting that the effects of Brexit are also short term and will be sorted by 2023 and finally the current labour crisis can be alleviated in the short term when historically UK employers have been slow in training and upskilling of the workforce and capital expenditure on digitalisation and mechanisation of processes is still lagging behind may EU countries.

Should the predictions prove to be inaccurate, inevitably the BOE will need to review its fiscal policy with a view of reigning in inflation using all fiscal tools at its disposal but the most fundamental tool would be to raise interest rates from the current record low level of 0.10% in likely .25% increments. The hope is that the economy and business will be sufficiently recovered and growing to bear such increases without the need to trim costs the largest of which is undoubtedly staff, only time will tell.

The above key issues amongst other key issues affecting the manufacturing sector are discussed quarterly by the Kent Manufacturing Forum co-hosted by ourselves, Kreston Reeves LLP, Barclays Bank and Knights Plc, the national solicitors. Please let me know if you wish to be included on the invitation list.