While the fragility of the UK Government combined with the onset of Brexit are presenting significant economic challenges in the year ahead, the UK’s thriving manufacturing sector appears to be doing rather well, thank you very much. But with falling business confidence and other global issues presenting the potential for further economic challenges, is the situation likely to remain so positive going forward?
More than a year on, the UK voters’ decision to leave the EU continues to cause market uncertainty for many British businesses. The unexpected outcome of June’s snap election has led to a weakened Government, raising further concerns about how the economic landscape might be affected once Britain finally emerges from the uncharted waters of Brexit negotiations.
The current level of economic confidence measured by the IHS Markit UK Business Outlook, a report based on a survey of 12,000 British companies, shows there are significant concerns about future prospects. Its July survey reported that UK business confidence is at its lowest level since 2011 with many respondents voicing concerns that the weak exchange rate will remain a key factor in pushing up input costs over the next 12 months. This lack of optimism is, however, not shared by many within the manufacturing sector.
As highlighted in the IHS Markit report, manufacturers continue to outperform other areas of the UK economy, with intentions to invest in capital expenditure at their highest level in the sector since 2014. Some manufacturers, which have already seen the benefits of lower commodity prices on world markets due to the devalued Pound, expect this current state of affairs to continue with a positive impact on their business.
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With the high levels of economic uncertainty likely to continue for the next two years at least, the enthusiasm and optimism of exporting UK manufacturers is largely based on their view that Sterling will remain devalued against major currencies like the Euro and the US Dollar, helping keep their prices competitive in overseas markets.
But the situation is far from rosy in the garden. Along with companies in the service sector, UK manufacturers are facing weak wage growth and decreased consumer spending within their domestic market. The IHS Markit report also highlights concerns about shortages and higher prices for a wide range of raw materials as well as chemicals, metals and plastics.
There are also other international political factors at play which could put a squeeze on the success of exporting UK manufacturers.
Germany’s elections and their potential to impact the value of the Euro could certainly be a game-changer. While Angela Merkel is currently looking solid, there’s still time between now and the September vote for unanticipated events to shape the outcome of these nation-wide elections. Should more radical parties like AfD gain further traction, it could significantly impact the stability of the single currency.
Meanwhile, in the USA, the unpredictability of Donald Trump’s presidency always has the potential to impact the value of the US Dollar and the wider health of the world’s largest economy.
During these times of economic turbulence it’s important for UK manufacturers to ensure they are suitably prepared for potential bumps in the road ahead. As we have seen over the past year, fluctuations in currency values present a threat as well as an opportunity, especially if companies are well-positioned to capitalise on market movements.
Businesses with foreign currency requirements, especially those trading internationally, need to look at how they can best conduct their foreign exchange transfers strategically to manage their exposure and secure profitability. It’s important to clearly understand their level of exposure is in terms of currency movement and then to set out an appropriate budget rate and create a suitable hedging plan. Using a combination of forward contracts, option contracts and spot deals in accordance with a set currency strategy can provide certainty and protection. Ultimately, protecting a bottom line and mitigating risk is paramount in these uncertain times.
Although it only accounts for around 10 per cent of the economy, the upturn in both the optimism and performance of the UK manufacturing is to be welcomed, especially when confidence across the wider business community appears to be declining as Britain’s EU withdrawal negotiations begin to gather pace. The growth of manufacturing, a sector, which accounts for more than half of UK exports, will be vital in sustaining the British economy in its post-Brexit future.
Greg Smith, Head of Trading at London-based foreign exchange specialist Global Reach Partners