What Does A ‘Hard’ Brexit Mean for UK Manufacturing?

What Does A ‘Hard’ Brexit Mean for UK Manufacturing?

Brexit means Brexit and, following the Prime Minister’s speech in late January where she set out what this will entail, Brexit means a ‘hard’ Brexit. While the Supreme Court has now ruled that Westminster will need to approve the Government’s Brexit plans, the intention of leaving the Single Market could have direct implications for the UK Manufacturing sector, especially those companies which currently export to other EU markets.

UK manufacturing is currently robust, with the sector ranked 11th in the world, responsible for 54 per cent of Britain’s exports and 2.6 million jobs.

Following the referendum we’ve seen a significant fall in the Pound against key currencies like the Euro and US Dollar which has played havoc with the markets. The British manufacturing sector has, however, dealt with this fallout amid waves of growth speculation and revised forecasts, not to mention this new found weakness in the currency.

The sector performed well in the second half of 2016, with a number of indicators showing growth across many aspects of UK manufacturing. While this has been positive news, UK economic growth in 2017 is expected to slow. The manufacturers’ organisation EEF has stated that only 23 per cent suggesting that opportunities will outstrip risks.

 The Pound’s exchange rate has been deemed largely responsible for the upswing in manufacturing as overseas buyers take advantage of the weaker currency, but it’s brought with it another problem – cost. Manufacturers have voiced concerns about Brexit talks dragging the pound down further and prolonging a period of profit pressure as import prices increase.

Following the Brexit vote, the Confederation of British Industry (CBI) noted that although the weaker exchange rate may have boosted overseas purchases, domestic orders had been dented. Likewise, as Sterling begins to eventually ramp up import costs and businesses have their profit margins squeezed, consumers are likely to witness price increases which could potentially cause a decline in domestic spend.

Looking forward, the prospect of a ‘hard’ Brexit creates some exciting opportunities as well as real threats for UK manufacturing. In the longer term, if the UK Government is successful in securing structured trade deals with key countries outside the EU, British manufacturing businesses could thrive in a new and favourable global trading landscape.

This optimistic view is supported by some positive developments with plans to launch some high-end designed products including specialty bicycles in the UK and the commitment from companies such as Rolls-Royce to continue their manufacturing in the UK. Indeed,

While the potential of securing positive trade deals outside the EU could provide some great opportunities for the sector, the concern is that if this process is dragged out it could affect confidence and lead to UK manufacturers moving operations overseas.

These global trade negotiations will be especially critical for the automotive manufacturing industry as the UK exports over 1.2 million cars every year and half of those make their way to the EU. Although the weak Pound may be contributing towards an upswing in UK-based car manufacturing now, some industry experts are concerned that investments in the latest technical advances such as autonomous and electric vehicles may be impacted post Brexit.

As we enter 2017, there’s likely to be a lot of currency fluctuations as markets adjust to new developments. It is therefore vital that exporting manufacturing businesses in Britain put in place a strategy to mitigate this uncertainty and the possible impact on revenues.

The trade deals with the EU are likely to cause an elevated level of volatility with the Pound as it will determine the price of manufactured products for British people, and also impact on the profit margins of businesses.

Manufacturing has stood strong in the face of Brexit but the negotiations which will follow the triggering of Article 50 could very likely bring more uncertainty. While the sector could see some short term benefit, especially through further fluctuations in the Pound, its longer term prospects will be determined by the success of Government negotiations with both the EU and other potential global trading partners.

Greg Smith, Head of Trading at foreign exchange specialists Global Reach Partners 

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