UK Manufacturing: Time for Structural Change?

The latest data that is emerging from the Office for National Statistics (ONS) and Make UK in May 2022 regarding the performance of the manufacturing sector makes concerning reading!

According to the ONS, Output Producer Price Inflation, which is the rate at which prices are rising, ex-factory stood at 15.7% whilst Input Price Inflation i.e. cost of inputs into the manufacturing process rose by 22.1% for the year to 31 May 2022. Ultimately, this means that gross margins are reducing, and combined with other relentless price increases such as power and fuel costs, means that business bottom line profits are decreasing. This, along with declining GPB against the dollar and euro, makes the prices of imported goods even more challenging in the small and medium business environment. Furthermore, the challenges administratively following Brexit have meant that UK exports, particularly to the EU, have declined and have not been replaced by new trading partners as many of the heralded so called new trading agreements already existed under pre-Brexit EU agreements. Some key focus areas include:

Stockpiling

Make UK have reported that stockpiling of, in particular of raw materials, remains a priority to be able to fulfil existing orders or to avoid delivery stockouts has meant that working capital has been significantly increased, leaving little cash for investment in improved technology such as robotics to lessen the reliance on increasingly expensive and scarce labour resources. The manufacturing sector pre-covid and pre Brexit was characterised by an aging technically skilled workforce, many of whom have retired and in many cases returned to the EU due to Brexit restrictions on foreign labour.

Inflation

We are all aware that inflation reached 9.1% in May 2022 and as reported by the Bank of England is forecasted to reach 11% by the autumn. This is the highest rate since 1982 where incidentally the base interest rate was 10%. A sobering thought! The Bank of England has, earlier this month, raised interest rates by 0.25% to 1.25%. Interestingly at the same time, but prior to the Banks interest disclosure, The Federal Reserve in the US raised interest rates by 0.75%, a recession risk or is it bold decisive action by the Fed?

Many financial experts are advocating the need for decisive action by Central Banks to avoid inflation becoming entrenched and economies entering an era of stagflation which is high inflation and low growth. Judging by the Bank of England’s cautious approach to increase interest they are clearly hoping that this soft approach will avoid further declines in economic growth on the onset of recession? A really tricky balancing act.

The impact on UK manufacturing

The reality is at present that the UK manufacturing’s sector share of overall GDP has fallen below 10% of total GDP which is the smallest in the G7. Most consumer goods are imported meaning that the UK balance of trade deficit in 2022 will achieve the highest deficit since the 1980’s when the last trade surplus was recorded. The UK also has the lowest manufacturing investment spend in any G7 country however this is in part due to relative size of the sector. The UK unfortunately has relied on the increasing use of previously cheap labour rather than investing in new technology, which has led to productivity lagging behind the US, Germany and France.

Hopefully, all the above factors will mean that the UK  takes some decisive action. For too long the UK has relied on cheap Chinese imports and many here in the UK have never experienced high interest rates as UK rates have been at record lows for since the financial crash of 2008 and indeed have not reached the dizzying heights achieved in the early 1990’s. This has fuelled a house price boom which at present has reached record highs and has underpinned UK economic activity. The UK still have the same old structural weaknesses that have existed for 50 years, low investment, poor productivity and lack of competitiveness internationally and, as mentioned above, a falling balance of trade. Both the key political parties are lacking in a coherent and co-ordinated strategy, the existing government’s idea is the “levelling up” programme which partly acknowledges there is a problem but this needs substantial investment which at present is seriously lacking, an increase in the current manufacturing base but also to develop and financially support new industry. Opposition parties have not really come up with any real plan of action should they gain power.

Any government needs a decisive action plan that focusses on the short, medium and long term. The idea needs focus on a larger, cleaner and fairer economy and that all government departments such as Treasury, International Trade and Education are aligned and actively working toward this objective. This is not an impossible plan as is illustrated by the success of the industrial powerhouses in Taiwan and South Korea. (Larry Elliott- Guardian Economics Editor)

The above areas are very relevant to the SME business owners and should you require advice on working capital management or indeed are seeking new sources or support from business finance, please feel free to contact Rodney Sutton, Head of Manufacturing on email here.