Real risks of Brexit vote to manifest by 2017

Posted on 19 Jul 2016 by Jonny Williamson

Manufacturers’ confidence in the UK economy and in their own business performance has been knocked by the vote to Brexit, according to a new survey out today from EEF.

While firms report little immediate impact from Brexit on trading conditions, the outlook for the next six months shows signs of decline and forecasts now point to the sector remaining in recession until at least the end of 2017.

Brexit – immediate impact

The immediate pictures looks promisingly steady. Findings reveal small balances of firms reporting decreases in UK order volumes (7%), EU export order volumes (8%), and their enquiry pipeline (8%).

Conversely, a balance of 2% have seen non-EU exports increase. More than 80% of manufacturers, however, say that their order intake is unchanged or it’s too soon to say what the impact has been.

Brexit – six month outlook

Demand conditions in the next six months are expected to be weaker. The biggest concern appears to be demand from UK customers, with almost three in ten firms (29%) bracing themselves for UK orders to decline.

EU orders are also at risk, with a balance of 12% of companies predicting a decline, exactly matched by those expecting non-EU orders to increase.

The survey shows that confidence for the 12 months ahead has tumbled, both in terms of firms’ faith in the UK economy and in their own business performance. Undoubtedly, this has been driven by the broad range of risks manufacturers have identified for the year ahead.

Key among these are exchange rate volatility – a concern for three quarters of manufacturers (75%). Other risks on their radar are political uncertainty (65%), expectations of increased costs (59%) and weaker demand (49%). Just 5% of firms have not identified any risks to their business in the year ahead.

Brexit – opportunity

Chief among these for manufacturers is the subsequently weaker pound, with more than half of firms (53%) seeing this as an opportunity. The case for calling it a benefit is not clear cut, however, with the majority of firms seeing exchange rate volatility as a risk (75%).

At the same time, a third of manufacturers (32%) have already seen input costs rise, with over half (51%) expecting this to be the case over the next six months.

Taking all of the risks, opportunities and uncertainties into account, 58% of firms say they will be reviewing their UK recruitment and 57% will be reviewing UK investment.

In both cases 16% of firms admit that they will be hitting the review button immediately, while for others it will be part of their normal planning cycle.

The potential impact on investment, however, is clear. For 43% of companies investment plans will continue unchanged, but 38% expect to be investing less in the UK over the coming year.

Factoring in all of the above, EEF has determined three growth scenarios for the sector, but says that in all three the sector will remain in recession until at least the end of 2017.

Terry Scuoler, CEO, EEF
Terry Scuoler, CEO, EEF.

CEO of EEF, Terry Scuoler explained: “The post-referendum drop in the value of sterling has been helpful to some manufacturers, but the overall impact is too nuanced for it to be glibly hailed as the hero of the piece.

“The opportunities it presents must be weighed against the three-quarters of manufacturers who see exchange rate volatility as a key risk in the next 12 months, and the third of firms that have already seen input costs rise.

“In the next six months, over half of manufacturers expect input prices to increase and that probably tells you everything about why the drop in sterling is a double-edged sword.

Scuoler continued: “All of our forecasts now point to our sector remaining in recession until at least the end of 2017. This means that, more than ever, we need Government to keep a firm and steady hand on the tiller.

“This means providing a stable business environment, scrapping burdensome policies and planned levies that add to our costs and reinstating a long-term national industrial strategy.

“The Government cannot wipe away the risks that Brexit will cause, but it can provide manufacturers with the reassurance and confidence to invest and seek growth from Brexit’s opportunities.”