Data suggest a loss of UK economic momentum

Uncertainty around Brexit and its knock-on effect on business continues as the UK’s Conservative Party moves through the process to elect a new leader — and the next UK prime minister.

A raft of recent surveys points to declines in UK manufacturing, including car manufacturing, as well as construction, and some experts are warning that political upheaval and trade wars threaten to cause more economic harm in the UK.

The uncertainty is a result of the country’s difficulty in finding a way to depart from the EU. After failing to broker a successful Brexit deal, Theresa May stepped down as the Conservative Party’s leader on 7 June, although she remains in place as prime minister until a successor is chosen.

There are now ten contenders to lead the Conservative Party and UK government. From the candidates — eight men and two women — a series of votes by Conservative MPs will result in two candidates going forward to a vote by paid-up members of the party, with the result announced the week of 22 July.

Brexit uncertainty continues

In April, the EU agreed a six-month extension to the Brexit deadline — to 31 October.

It remains unclear, however, what form the UK’s departure from the EU will take. A no-deal exit remains possible, as does a negotiated deal — either on the existing terms negotiated by May or a possible newly negotiated deal. Further scenarios — a second referendum vote by the UK population, revocation of Article 50 to cancel Brexit, and a general election — cannot be ruled out in the coming weeks and months.

Carolyn Fairbairn, the director-general of the UK business lobby group the CBI, warned Conservative leadership contenders in an open letter of the dangers of a no-deal Brexit. She said that “leaving the EU with a deal is the best way forward. Short-term disruption and long-term damage to British competitiveness will be severe if we leave without one.” She added: “The vast majority of firms can never be prepared for no-deal, particularly our SME [small and medium enterprise] members who cannot afford complex and costly contingency plans.”

Recent economic data show that the UK is experiencing challenges as the political uncertainty continues. The UK manufacturing sector hit a 34-month low in May, evidenced by the fall in the Purchasing Managers’ Index to just below the neutral 50 benchmark figure for the first time since July 2016 — the month following the UK’s Brexit referendum.

The IHS Markit/Chartered Institute of Procurement and Supply survey is a weighted average of five indices: new orders, output, employment, suppliers’ delivery times, and stocks of purchases.

In a press release, Duncan Brock, group director at the Chartered Institute of Procurement and Supply, warned that a global slowdown and trade wars “could tip the scales even further” and “increase the likelihood that the UK manufacturing sector will remain in contraction territory”.

Food manufacturing

Dan Slater, ACMA, CGMA, who works as group financial controller at 2 Sisters Food Group in Yorkshire in the UK, said economic and political uncertainty is causing leaders to delay decisions on strategic investment and consumers to delay big discretional purchase decisions.

“The food manufacturing sector,” he said, is “somewhat sheltered from extreme cyclical peaks and troughs in consumer demand — everyone has to eat after all.”

But he added, “We do need to continue to react to changes to consumer behaviours to ensure we’re operating in the growth areas within food — health, British, convenience, and indulgent [or] luxurious to name a few.”

The UK’s construction sector saw a decline in May, the Purchasing Managers’ Index for the construction sector revealed. An increase in house building failed to compensate for reduced commercial construction and civil engineering activity.

UK car manufacturing in April saw a steep fall of 45%, and commercial vehicle manufacturing took a 71% hit as a result of planned factory shutdowns, according to research by the Society of Motor Manufacturers and Traders (SMMT). The fall in car production was due to most large automakers bringing forward and extending temporary production stoppages normally scheduled for later in the year during the summer holiday period.

Mike Hawes, SMMT chief executive, said in a press release the car manufacturing figures were evidence of the “vast cost and upheaval Brexit uncertainty has already wrought on UK automotive manufacturing businesses and workers”. He added that “prolonged instability” had done “untold” damage and that the fear of a no-deal Brexit was causing investment to stall.

Euro-sterling rate

Jeremy Hawkins, senior European economist at Econoday, said the sterling-euro rate had remained “surprisingly stable”. He added: “The pound has come down a long way since the [Brexit] referendum back in 2016 so … some people may regard it as being, purely on a fundamental basis perhaps, slightly undervalued in the first place. … Some of the bad news has already [been] fully discounted.”

Hawkins said the building up of inventories in the first quarter of this year helped boost GDP figures “and now we are starting to get payback for it”.

Businesses frontloaded a lot of output before the original 29 March Brexit deadline and are now left with inventories “rather higher than they would want in relation to what remains pretty soft demand”. He added: “What helped GDP in the first quarter could now be one of the key reasons [for] a pretty soft second quarter.”

But he said the first- and, when released, the second-quarter GDP figures would need to be looked at together to determine the underlying trend in growth.

The UK’s flat services sector may be a knock-on effect from the weakness in manufacturing, Hawkins suggested. “It does seem more generally that the economy has lost underlying momentum irrespective of Brexit — Brexit over the course of the last few months,” he said.

He said there had been a global deceleration in manufacturing activity of which the UK was a part. The JP Morgan Global Manufacturing PMI released in early June revealed a stagnation in production volumes and a decline in new orders at the fastest pace since October 2012.

In the US, manufacturing grew for the 33rd consecutive month in May, but the increase was the lowest since October 2016.

The World Bank, in its June Global Economic Prospects report, predicts that global economic growth will slow to 2.6% for 2019 and then edge up to 2.7% in 2020 and 2.8% the following year. Its previous projection, in January, was for 2.9% growth in 2019.

─ Oliver Rowe (Oliver.Rowe@aicpa-cima.com) is an FM magazine senior editor.