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UK Factory Costs Rise at Record Rate

The weakened pound was always going to cut both ways for UK manufacturers. Following on from the vote to leave the United Kingdom, the immediate devaluing of the pound meant that yes, UK products were cheaper to buy for countries around the world, but also the costs for factories would rise in tandem.

Until January, however, manufacturing costs were being outstripped by the increase in demand for British product, both domestically and from overseas markets. Worryingly, that trend did not continue into 2017 as data firm Markit recorded the biggest ever increase in input costs for UK manufacturers, sending its input prices index to an all-time high of 88.3.

The highest reading since measurements were initially taken in 1992 is a significant rise from the already steep 77.7 recorded in December, and is high above the 50 reading which indicates no change.

More than half the firms surveyed by Markit blamed the fall in Sterling with the increase in the cost of raw materials, but factors like the rising price of oil is also a factor. Worryingly for consumers, there are initial signs that manufacturers are starting to pass these costs on to consumers, as Markit’s output index posted one of its biggest jumps ever.

If that trend is echoed around other sectors, it could indicate that the UK is in line to see some strong inflation.

Nevertheless, UK manufacturers reported a fantastic start to the year with factory output growth growing at its fastest rate in 2 and a half years. The main source of the new orders was from within the domestic market, according to the survey, as British manufacturers and companies bought stainless pipe fittings and NPT fittings, alongside other British made goods. Overseas orders also saw a slight bump in sales.

Rob Dobson, Senior Economist at IHD Markit said: “UK manufacturers have reported a bumper start to 2017, but are also seeing prices rise at an unprecedented rate. Factory output growth accelerated to a 32-month high in January, as solid domestic demand continued to drive production volumes higher. There were signs that the boost to export orders from the weak exchange rate was waning, as growth of new business from abroad slowed sharply.

“The big numbers coming out of the January survey were for the price measures. Input cost inflation spiked to the highest seen since data were first collected in 1992. Over 55% of companies’ link rising costs to the exchange rate. However, we’re also seeing more companies reporting domestic supplier price hikes resulting from the rising cost of commodities such as fuel, oil, plastics and steel. With cost pressures increasingly feeding though to higher selling prices at factories, it looks inevitable that consumer price inflation will rise further in coming months.

“The question is whether increased cost inflationary pressure will act as a drag on manufacturing growth going forward. Companies seem fairly sanguine on this front, as a new index tracking business confidence signals optimism climbed to an eight- month high. Taken alongside robust output growth, rising new order inflows and job creation, all signs are pointing to a solid contribution to UK GDP from manufacturing during the opening quarter of 2017.”

Theresa May Announces Interventionist Industrial Strategy

The Prime Minister, Theresa May, has announced a new interventionist industrial strategy in a bid to drive the UK away from an over reliance on a services sector, which currently dominates the UK economy.

The announcement comes after mounting pressure from members of her own cabinet and heads of the British manufacturing industry to make plans for the UK’s struggling manufacturing industry going forward. Indeed, the calls for answers have only grown louder since Mrs May announced that yes, the UK would be leaving the single market in the coming years.

Broadband, transport and energy are highlighted aspects of the plan which bid to “align central government infrastructure investment with local growth priorities”. The ten point plan outlined by the PM involves:

• Investing in science, research and innovation
• Developing skills
• Upgrading infrastructure
• Supporting business to start and grow
• Improving government procurement
• Encouraging trade and inward investment
• Delivering affordable energy and clean growth
• Cultivating world-leading sectors
• Driving growth across the whole country
• Creating the right institutions to bring together sectors and places

Further to this, the government will set out a green paper with the ways that they can help to support businesses by addressing onerous regulatory barriers and agreeing trade deals to make up for the fact that UK manufacturers are soon to lose access to the single market.

Additionally, the government will look to support those who wish to set up establishments which encourage innovation and skills development, alongside boosting STEM skills, digital skills and numeracy whilst investing £170m in new technology institutes.

That fund will be known as the Industrial Strategy Fund and will look to benefit “smart energy, artificial intelligence and 5G mobile broadband”, however, such a small sum wouldn’t affect research and deployment in these areas dramatically.

In total, £4.7bn in additional funding will be provided by the government for R&D, as announced in November of last year. As part of the plan, the government are holding a "consultation on what should be our priorities for a long-term industrial strategy".

The director-general of the CBI, Carolyn Fairbairn said "It must help fix the country's productivity problems and remove the regional inequalities that have dogged our country for generations, having a positive impact on living standards, wages and the future opportunities of many people."

However, she stressed that it will be through skills training, regulation and infrastructure that the government will see the best results, rather than through cash injections. A statement that we, as one of the leading suppliers of welding fittings in the UK, wholeheartedly agree with.

However, Labour’s shadow business secretary, Clive Lewis, questioned how much money the government was investing into the strategy, saying "We await further detail, but what's been announced so far will fall far short of getting us back to where we were in 2010, let alone equip our economy for the challenges of the 21st Century."

Nevertheless, the announced plan isn’t a million miles away from what UK manufacturing has been asking for over the last five years. Whether what comes out at the end of the consultation period is workable is something else entirely, but this is welcome news so early in 2017.

What Might Leaving the Single Market do for UK Manufacturing?

Earlier this week, Theresa May broke the months long silence on what kind of future we can expect with the European Union. With Article 50 due to be triggered later this year, successive journalists, politicians and industry heads had pressed the government to reveal their plan for Brexit.

In a speech delivered on Monday, Mrs May said that the UK “cannot possibly” remain within the European single market, which ensures free trade between all European nations, because that would mean “not leaving the EU at all”.

It’s a blow that many have expected, but not one that was touted as a serious possibility by the Leave campaign during the referendum campaign. During the same speech, the PM insisted that she would push for the “freest possible trade” with European nations, but that the EU trying to “punish” the UK for leaving would be “an act of calamitous self-hard”. She also added that “I am equally clear that no deal for Britain is better than a bad deal for Britain”, words which may strike fear into the heart of the UK’s manufacturing business.

In response, Labour have warned of the “enormous dangers” that the PMs plans posed for the UK, and the European Parliament’s chief negotiator said that there could be “no cherry-picking” by the UK in talks.

But what does this mean for UK manufacturing? Well, it’s perhaps the single most important event to happen to the industry in a generation.

Put plainly, around 44% of all exports from the UK go into the European market. At present, all of those exports to Europe are free from duty, which makes them more affordable for overseas markets and therefore, more popular.

Mrs May appears to be strapping herself in for what commentators have begun to call a “hard Brexit”, wherein the UK receives little to no concessions from the EU on the way out. For British manufacturers like us who produce BSP hose fittings and PTFE hose fittings, the prospect of a levy being placed on our goods as we attempt to sell to the EU could be devastating to the industry.

Specifically, Mrs May said on the prospect of an agreement with the EU that any such agreement must "allow for the freest possible trade in goods and services", Mrs May said.

"But I want to be clear: what I am proposing cannot mean membership of the single market.

"It would, to all intents and purposes, mean not leaving the EU at all.

"That is why both sides in the referendum campaign made it clear that a vote to leave the EU would be a vote to leave the single market."

Nevertheless, the PM has said that the UK won’t budge on controls for immigration from European nations, something which is a requirement if free trade is to be possible. Much of the PR spin after the speech has been around the way that the UK will be free to set up trade deals with the rest of the world – something the UK manufacturing industry will eagerly await.

UK Manufacturing Enjoys Remarkable December

There’s no doubting that for UK manufacturers, 2016 was a – shall we say – interesting year. What began under a cloud of Brexit uncertainty turned to shock as June’s vote to leave the EU rocked the industry. What followed was a sharp increase in export orders, thanks to a devalued pound. In turn, that meant high employment numbers.

All good news then, but economists remained worried about the state of the manufacturing industry going in to 2017. With investment in the UK manufacturing down and the costs of buying materials from abroad rising sharply.

As such, it’s come as a pleasant surprise to find that new figures from Markit/CIPS have found that during December 2016, British manufacturing growth rose to a two and a half year high, fuelled by new orders from abroad.

Off the back of these new orders, the manufacturing PMI rose to 56.1, high above the 50 reading which indicates no change. That’s the fastest growth since June, 2016, and handily beats out November’s strong reading of 53.6. An independent poll of economists in Routers suggested that December would post a number of 53.1.

Markit found that though domestic and export orders grew within the month, so did the cost pressures that factories are facing – thanks largely to the devalued pound. The weakness of the pound has caused significant issues in sourcing parts and materials from overseas, and economists are suggesting that these price rises are going to feed in to consumer prices during 2017.

However, businesses like ours who produce stainless pipe fittings and NPT fittings don’t rely greatly on parts of machinery from overseas, leading to a net benefit for our business.

Rob Dobson, Senior Economist at Markit, said: “The UK manufacturing sector starts 2017 on a strong footing. The headline PMI hit a two-and-a half year high in December, with rates of expansion in output and new orders among the fastest seen during the survey’s 25-year history.

“Based on its historical relationship against official manufacturing output data, the survey is signalling a quarterly pace of growth approaching 1.5pc, a surprisingly robust pace given the lacklustre start to the year and the uncertainty surrounding the EU referendum.

“The boost to competitiveness from the weak exchange rate has undoubtedly been a key driver of the recent turnaround, while the domestic market has remained a strong contributor to new business wins. A plus point from the December survey was that the expansion was led by the investment and intermediate goods sectors, suggesting capital spending and corporate demand took the reins from the consumer in driving industrial growth forward.

On the prices front, higher input costs continued to feed through to increased selling prices, with rates of inflation remaining among the highest seen during the survey history. Of the companies citing a cause of higher costs, 75pc linked the increase to the exchange rate.”

For all the talk of the weakened sterling, however, December’s numbers prompted the pound to rebound to its highest value in two weeks, alongside the FTSE100 rising to its highest all time level of 7,205.21.

UK Manufacturers see more Good than Bad for 2017

The New Year is a time for optimism, a time when hope runs freely and the potential of the next 365 days feels almost tangible. Whilst most of us are busy looking at our prospects in our love and business, the UK’s manufacturing organisation (the EEF) have been looking towards the future of manufacturing.

Now, in a survey of executives across the manufacturing sector, the EEF have found that UK manufacturers are positive and ambitious about their personal business plans for 2017, despite the expectation that the many economic risks of 2016 will be carried forwards into this year.

The EEF found that half of the manufacturers found that just over half of manufacturers saw more opportunities than risks in 2017, but a great many were still worried about what the year might bring.

In particular, manufacturers remain unsure about the Brexit vote, and among the risks most concerning from 2016 executives picked significant movements in exchange rates, economic volatility in major markets (like China) and uncertainty around the UK’s place in the EU going forward.

In regards to exchange rates, the report found what many of us had expected, that the post-referendum weakness of the pound had increased import costs. In turn, this has led to higher construction costs. Executives said that this continues to be a concern into 2017, and will reduce profit margins during the year. They also couldn’t rule out this resulting in price rises for consumers.

It’s also impossible to rule out the role that political uncertainty could have on the economic stability of major nations. Elections in France and Germany in 2017 will test the viability of the UK’s biggest trading partner and Donald Trump’s isolationist trade policy could have disastrous implications for the US, as well as the rest of the world. Specifically, manufacturers said that Trump’s policies could threaten growth in emerging markets, which in turn could weigh heavily on global trade.

Though this wouldn’t have a dramatic direct effect on manufactures like us, who produce JIC fittings and hose fittings UK, the knock on effect of a depressed global trade would cause damage to manufacturers in ever sector.

Despite these myriad concerns, more than half of the survey’s respondents said that their company would increase investment in technology and innovation. Meanwhile, 44% said that they would increase their marketing efforts and brand promotions in 2017.

Another 44% said that they would look into moving into the export market in an effort to deliver their strategic business plan, whilst other actions identified by bosses was included vertical integration, increasing services revenue and diversifying into new supply chains.

Commenting on the survey findings, Terry Scuoler, CEO at EEF said in a statement, "Global political upheaval means that 2017 looks set to be another bumpy ride, with manufacturers forced to navigate uncertainty, unpredictable economic conditions and a number of risks that have been amplified by Brexit.

"Against this backdrop, a smooth journey is far from guaranteed, but firms are strongly attuned to the challenges and remain fully focused and determined to deliver their long-term plans for growth."

Brexit Britain could see ‘Massive’ Manufacturing Expansion

Amidst all the doom and gloom of post-Brexit economy predictions, there is, undoubtedly, the potential for a thriving economy outside of the European Union. With the correct trade deals and some favourable winds behind us, we could see Britain prosper and shine.

Now, a new report from the Centre for Policy Studies by Rishi Sunak (Conservative MP for Richmond) says Brexit gives Britain the opportunity to create American-style “free trade zones”, which, in turn would fuel a massive expansion of manufacturing and trade.

The initiative claims up to 86,000 jobs could be created if it’s as successful here as it is in the USA, and would benefit the UK’s most deprived areas. The rules of the EU current make such initiatives impossible, as states are constrained from setting their own customs rates and regulations.

Free trade zones (or Free Ports) could be based around British harbours and would be within our geographic boundary, but ‘outside’ it for the purposes of customs duties. It means that goods and parts could be imported, manufactured or re-exported from the zone without incurring the usual domestic import procedures or tariffs.

Mr. Sunak has stressed how the tax advantages could encourage more manufacturing and processing in Britain, something which would be important for Britain to succeed in a post-European environment. Presently, a large proportion of the economy comes from our large and successful service economy. However, a diversification of the UK’s economy is required if we’re to grow stronger in the future.

Meanwhile the EEF have urged the Chancellor to use his Autumn Statement to tackle the fallout from political uncertainty and reassure nervous businesses by announcing measures to boost investment and growth in manufacturing.

The manufacturing trade body said research shows that one in four manufacturing companies are withholding investment plans amidst the increased political uncertainty. They said that Mr Hammond should use his statement later this month to introduce a “moderate fiscal stimulus package” that would support UK manufacturers like us, who produce PTFE hose fittings.

Figures last week indicated that manufacturing output rose 0.6% during September, beating economists’ forecasts of a 0.4%. However, that news was bracketed by the fact that over the last 12 months, manufacturing output had only climbed 0.2% as the sector struggled to maintain any kind of upwards trajectory.

Terry Scuoler, chief executive of EEF, said: “The whole of Government must get behind UK businesses and demonstrate a clear appreciation of the need to back such a strategy, backing sectors while also tackling systemic problems such as skills, energy costs and infrastructure weaknesses.”

This all comes at a time when an alleged internal memo from the Government laments the lack of a Brexit plan, pointing to understaffed government and disagreements within the cabinet meaning that the direction of Brexit is deeply confused. The government have been quick to disavow the note, saying that they don’t recognise it, but nevertheless, they appear to be grasping for a strong public position on Brexit.

UK Manufacturing Falls Sharply in October

Following stronger than expected growth in the post-Brexit months, it had appeared that the UK’s manufacturing industry had found a strange success. The falling value of the pound meant that for companies buying British from abroad, our goods were significantly cheaper than they had been before.

On the other side of that coin, the cost of buying materials from abroad jumped in price for British manufactures, and surveys indicated that investment into UK manufacturing businesses was put on hold amid the uncertainty.

Nevertheless, the jump in export orders meant that manufacturing growth grew steadily into September. However, if numbers from the Office for National Statistics (ONS) are to be believed, that growth came to a shuddering hold in October.

A new study from the ONS suggests that output from manufacturers fell by 0.9%, down significantly from the growth of 0.6% seen in September. In total, industrial production dropped by 1.3% in October after falling 0.4% in September, marking the biggest fall in overall production within the UK since August 2013.

The ONS point to the temporary closure of a major oilfield as part explanation of the fall, saying "The increase can largely be attributed to continued maintenance to the Buzzard oilfield in the North Sea," but economists were still surprised by the numbers, which had been predicted to be positive.

The fall in industrial production has dealt a blow to the UK’s GDP growth prospects in the final quarter of 2016.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "With much of the latest survey evidence being decent and retail sales surging in October, we had believed that there was a good chance that UK GDP growth in the fourth quarter could match the resilient 0.5% quarter-on-quarter achieved in the third quarter,"

"October's 1.3% drop in industrial production puts a significant dent in fourth-quarter growth prospects, as it now looks odds-on that the sector will contract in the fourth quarter and possibly markedly - even allowing for the fact that there could be a marked bounce-back in oil and gas extraction as the oilfield comes back into operation.

"While industrial production only accounts for 14.6% of total output, contraction would be a blow”, he further stated.

Indeed, these numbers come as a surprise to most manufacturers like us, who produce BSP fittings for clients around the world, primarily from British sources materials. Nevertheless, it’s clear from the ONS numbers that certain areas of the UK’s manufacturing industry have suffered significantly during October.

Markit, meanwhile, suggested that October was a strong month for manufacturing growth, setting the PMI for October at 54.2 – significantly higher than the 50 which marks an unchanged sector, They did, however, suggest that manufacturing output was beginning to fall, albeit still in the positive numbers.

It’s unclear at this time whether CIPS will respond to the ONS report, but with significant discrepancies between the two it wouldn’t be a surprise to hear more about this as we approach the end of the calendar year.

New Survey Shows Brighter Post-Brexit Future, but a Darker 2017

Long one of the less touted aspects of the British economy, the UK manufacturing industry has recently roared back into the public conversation. Side-lined by a booming services economy and not one of the more glamourous areas of the economy, the Brexit vote has resurrected focus on the sector, with various sides either claiming that it’s doomed if we go it alone in the world or could become the centrepiece of a renewed United Kingdom.

The months following the Brexit vote have been fascinating, as the weakened pound has spurred on purchases of British product from abroad but held back companies from investing in themselves as uncertainty set in.

Now, a new report from the manufacturers’ organisation EEF claims that manufacturers are seeing a “delayed recovery”, with increased output and orders along with a boosted optimism for jobs. They claim that the sector is now regaining ground after what they described as a “sluggish” 18 months. Despite this, they said that manufacturing will contract in 2017.

The organisation which polls British manufacturers lie us who produce dowty seals said that the pressures of inflation and the significant price rises in the pipeline are factors which will weigh heavily on domestic activity during 2017.

EEF chief economist, Lee Hopley said: “This is the most upbeat reading on the state of manufacturing we’ve seen for some 18 months and signals the start of brightening conditions, which had been briefly knocked off course following the referendum.

“This anticipated turnaround can be attributed to a range of factors including the resilience, thus far, of the UK economy but also the strengthening of demand in a number of major markets. Critically, this should spur some new investment and recruitment activity to fulfil new customer demands.”

In 2017, the EEF expect manufacturing output to fall by 0.2%, and the economy as a whole to grow by a modest 1.3% as Brexit negotiations begin to hit harder on the economy.

Disappointingly, the new chancellor Mr. Phillip Hammond chose not to use the Autumn statement (his first in charge) to discuss reform for the manufacturing sector. Groups within the sector had gone on record suggesting that red-tape removal and tax breaks would help shore up the industry for the darker days ahead, and it was widely expected that manufacturing would get a nod during his statement.

Unfortunately, no such mention came around. The chancellor has spoken about the fact he has “no doubt” that Britain can strike a free trade deal with the likes of China, but the government seem cagey about the prospect of a free trade deal with Europe, who purchase around half of the UK’s exports.

Nevertheless, Britain remain in the EU for the time being having not trigged Article 50 yet. To date, only Nissan have been made promises regarding the UK’s future in regards to trade deals, with the rest of the manufacturing industry enduring a cloud of uncertainty which is likely to continue to dampen profits.

UK Manufacturing Sees Export Rise, Cost Increase

Over the last 6 months, UK manufacturing has gone from solid economic cornerstone to Brexit lightning rod, eagerly watched by commentators on both sides of the debate as a measure of confidence in the economy.

The months following the referendum have been revealing, though not in a way that anybody could truly predict. Gloomily cast as a potential candidate for extinction by the Remain camp and never refuted by the Leave side, it seemed as though UK manufacturing might fall off a cliff in the aftermath of the vote, but the opposite seems to have happened. With growth witnessed in the sector, powered by strong demand for British product from overseas.

Now, Markit/CIPS purchasing manager’s index for manufacturing has been published for October, and it reveals that manufacturing continued to grow as we reached autumn, sitting at 54.3. That figure is lower than September’s 55.5 reading, but still above the 50 mark which indicates expansion.

So, what’s driving that expansion? Well, if you ask the experts, they think it’s the falling price in the pound.

With Sterling at an extremely low price, it’s meant that buying British from overseas is cheaper than it has been in recent memory, boosting orders from the US, EU and China. The expansion in orders has also driven employment in the sector up for the second month running, after numerous years of decline.

On the other hand, the weak pound also dramatically increased the cost of importing raw materials to the UK, like BSP 150lb class pipe fittings. Price inflation for goods being bought by manufacturers rose at its highest rate in 5 years, and was the fourth highest in since the survey began in 1992.

Rob Dobson, senior economist at Markit, said: "The UK manufacturing sector remained on a firm footing in October and should return to growth in the fourth quarter.

"Despite slowing from September's highs, growth of output and new orders continued to defy expectations, rising at marked rates and supporting the fastest job creation in a year.

"The main topic of the latest PMI survey was, however, the impact of the sterling depreciation on manufacturers.

"On the positive side, the boost to competitiveness drove new export order inflows higher, providing a key support to output volumes.

"The downside of the weaker currency is becoming increasingly evident, however, with increased import prices leading to one of the steepest rises in purchasing costs in the near 25-year survey history."

The pound, however, enjoyed a rally yesterday as it was revealed that the High Court has declared that the Conservative government must seek Parliament’s permission to trigger Article 50. This has thrown some doubt over the prospect of the UK leaving the EU at all, but with a large majority of MPs expected to listen to the will of the nation, it’s extremely likely we trigger Article 50.

It does, however, give Parliament leverage to demand to know what terms Mrs May and her team are looking for in the Brexit split. Thus far, they have been cagey in saying exactly what their terms are, but with a need for safe passage through the house. We (and the UK manufacturing) industry could get a glimpse into a possible future very shortly indeed.

UK Factory Output Declines Significantly in July

Bad news for British Manufacturing today as official data from the Office of National Statistics shows that manufacturing output fell in July at the fastest pace in a year.

The news confirms earlier signs that factories took an instant hit after the vote to leave the European Union was confirmed – a vote which saw billions wiped off the value of the stock market. Overall, manufacturing output fell 0.9%, a steep rise from the 0.2% drop in June and far ahead of the 0.4% drop predicted by economists for July.

The difference between this survey and others which have previously been reported is that this one, commissioned by the ONS, looks solely at manufacturing following the Brexit vote. Indeed, data for July wasn’t as bad as it could have been, having been bolstered by excellent performance in gas and oil production in the UK.

The data already analysed for August by Markit showed that whilst output for July plunged, it rebounded sharply in August as Brexit shock faded quicker than anticipated, staging one of the best recoveries Markit have ever seen.

However, one of Markit’s main assertions that the UK manufacturing industry benefitted heavily from the weakened pound is directly refuted by the ONS. They claim that there was no sign of manufactueres getting an immediate boost from the fall of sterling’s value, because contracts are usually slow to respond to currency fluctuations.

The news that manufacturing output took a hit in July has sent the value of the pound down from its seven week high, dropping to $1.34. That’s a change of -0.25%. Nevertheless, the FTSE 100 traded upwards for the first time in three sessions after the output news was released, climbing a modest 0.03%.

With industrial output on the rise thanks to oil and a strong manufacturing recovery in August, you’d be forgiven for expecting GDP growth. However, according to Samuel Tombs of Pantheon Macroeconomics has said that it’s still up in the air whether the UK’s Q3 is in decline or not. He said: "The rise in production entirely reflected a 4.7pc month-to-month jump in mining and quarrying output, which is extremely volatile. Manufacturing output fell 0.9pc month-to-month, its third successive fall, while output in the energy and water supply sectors rose by 0.4pc and 0.7pc respectively.

Production in July was 0.1pc below its Q2 average, so we can’t rule out industry dragging on GDP growth in Q3. Production likely fell back in August, as mean-reversion in mining and quarrying probably offset the pick-up in manufacturing output signalled by the PMI last week. With surveys pointing to a slump in construction output and a sharp slowdown in growth in services output, we still can’t rule out a decline in GDP in Q3 at this stage."

Of course, this is all irrelevant for the many manufacturing businesses like ours who produce things like 150 BSP pipe fittings who are interested in what happens when we leave the EU fully. Trade deals are yet to be struck and we’re still none the wiser as to what our future might look like. In the medium and long term, that’s what’s important to the manufacturing industry.