United Kingdom

Brexit stockpiling triggers surge in manufacturing sector activity

Stockpiling ahead of the Brexit transition deadline prompted activity in Britain's manufacturing sector to rise at the fastest pace for nearly three years in November, the results of a closely-watched economic survey have revealed.

Businesses up and down the country have been ramping up their production levels in recent weeks as knife-edge trade talks between the Government and the EU continue.

But, Duncan Brock, group director at the Chartered Institute of Procurement & Supply warned that 'there was little in the figures to suggest a sustainable recovery once we move into 2021.'

Frenetic: Activity in the manufacturing sector has ramped up in recent weeks amid trade talks

Mr Brock thinks new orders and activity in the manufacturing sector could 'drop off a cliff' in January as potential border disruptions are thrown into the mix.

This week, foreign secretary Dominic Raab said Britain was in the 'last leg of negotiations' with the EU over a post-Brexit trade deal. 

Raab said it was likely the talks were entering the 'last real major week', and an agreement remained possible if the EU showed 'pragmatism.'

He added that the talks centred on resolving a 'fairly narrow' number of issues, including fishing rights.

Leaders have until 31 December to agree a deal for how trade will operate after Brexit.

With a month to go before the Britain exits the EU single market and customs union, the latest IHS Markit/CIPS report said many companies were seeking to insure themselves against a no-deal Brexit by stockpiling raw materials and bringing forward export orders. 

And, with trade talks going close to the wire, activity in Britain's manufacturing sector rose to the highest level for 35 months, the survey showed.

The manufacturing purchasing managers' index reading hit 55.6 last month, up from 53.7 in October. Any reading above 50 indicates growth and the sector has remained in positive territory for six consecutive months.    

Manufacturing business managers reported an uptick in production volumes and said this was linked to companies re-opening following Covid-19 closures earlier in the year.

Machinery and equipment orders for warehouses were particularly strong, but the sector was held back by a fall in consumer goods orders with declines in both production and new business, the survey found.

Rob Dobson, director at IHS Markit, said the falls in consumer products was due to 'depressed household sentiment caused by mounting job losses and the UK re-entering lockdown.'

He added: 'Whether the upturn of manufacturing production can be sustained into the new year is therefore highly uncertain, especially once the temporary boosts from Brexit purchasing and stockbuilding wane.' 

Talks: EU's chief negotiator Michel Barnier, flanked by anti-Brexit No Deal protesters with placards

Activity: Britain's manufacturing sector has been in growth mode for the last six consecutive months

Manufacturing job losses were recorded for the tenth consecutive month in November. Jobs were cut at the slowest rate since February, but the decline was still considerable.

'Reductions to staff headcounts were attributed to redundancies, cost reduction initiatives, staff restructuring, natural wastage and the ongoing impact of the COVID-19 pandemic', the survey said. 

This was despite business optimism in the manufacturing sector about the year ahead rising to a six-year high. 

Input cost inflation accelerated to a two-year high in November and companies responded by hiking their average selling prices by the biggest sum in the year to date.  

Mr Brock of CIPS, warned that job losses in Britain had affected consumer confidence, which is having a knock-on impact on the manufacturing sector. 

He added: 'Panic buying aside, there was little in the figures to suggest a sustainable recovery once we move into 2021.

'Job shedding continued last month and new business could drop off a cliff in January as potential border disruptions are thrown into the mix.

'The prospect of an extended recession continues to hover above the UK economy until clarity around a Brexit deal is reached and hopes for an effective vaccine supply chain are realised bringing much-needed normality.'

Fhaheen Khan, a senior economist at Make UK, said the IHS Markit survey pointed to a continued, yet subdued growth of the sector as orders slowly returned following the easing of lockdown restrictions.

He added: 'It also appears the alarm bells that took hold of manufacturers just before the first EU-exit deadline have returned in some capacity as businesses sought to stockpile. While it may be rational in today’s uncertain environment, it is creating the impression that manufacturing is performing well just before the transition period ends.

'It is clear the uncertainty is felt by both sides as EU manufacturers are also stockpiling to some degree resulting in a short-term boost to business for UK manufacturers too. 

'However, such actions are generally followed by a period of depressed activity as manufacturers begin to service future orders using these very stockpiles.'

UK plc faces double whammy 

The UK was today warned it faces a double whammy of one of the worst coronavirus hits of any major economy - while businesses that have ridden out the crisis could be hammered by the failure of EU trade talks.

The latest outlook from the OECD suggests Britain will be affected more dramatically than most other countries, with only Argentina expected to have a deeper recession this year.

The international body has downgraded its forecasts for a swathe of countries, with the UK now facing an 11.2 per cent slump in GDP - far worse than the 3.7 per cent fall in the US, which has been saved by its tech sector.

Separately, the Treasury's OBR watchdog has cautioned that the collapse of Brexit trade talks would hammer sectors that have so far proved resilient to the pandemic.

The grim picture underlines the woes facing the economy as it wrestles with coronavirus and fundamental shifts in trading terms.

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