The British economy is rebalancing in a post-Brexit trend that has long been the aim of policy makers to bring about sustainable long-term growth as Britain leaves the EU. A weak pound is suppressing consumer spending, which in turn is increasing inflation through more expensive imports. Manufacturing has become a beneficiary of these trends because British goods are commensurately less expensive, thus increasing exports.
Recovery, whilst beneficial, is not the whole answer. Rebasing the strength of production, as opposed to consumerism, paves the way for a stronger, more sustained economy.
Manufacturing sector improving
According to the Purchasing Managers’ Index (PMI), an indicator of the economic health of the manufacturing industry, there is a modest realignment under way.
This is evidenced by the strongest Q4 2017 performance in three years. Downward pressure on prices caused by the fall in sterling are calming, and order books are strong. Analysts reviewing the PMI report that this equates to manufacturing growth of around one per cent a quarter – a promising upturn in comparison with the generally lacklustre British performance over recent years.
To put this into context, the EU figure from the PMI for December is 60.6 per cent against the UK’s at 56.3 per cent. This is the widest differential for over a decade, with the UK still trailing its European neighbours.
UK supply and demand
The demand for UK products appears to be generated largely from Europe, North America and the Middle East, capitalising on the lower pound as an opportunity to increase margins rather than increase volume or cut prices.
The UK is beginning to struggle to keep up with demand, mainly due to cuts to planned investment since the referendum. Manufacturers have been dipping into stock pools and are now beginning to struggle with production levels, resulting in backlogs.
The PMI information suggests a positive trend, with manufacturers seeking to expand capacity by concentrating on investment and intermediate products, such as metal bonding adhesive manufactured by specialists such as http://www.ct1ltd.com/product-applications/metal-to-metal-adhesive/. On the downside, it may be too little too late following the longstanding delays in investment and reluctance to commit to the UK post-Brexit.
At 10 per cent of GDP, manufacturing is still producing less than before the last deep recession; therefore, production has a long way to go to achieve pre-recession levels.