With the economy gradually coming back to life after the Covid-19 lockdown, some sectors are experiencing a more rapid recovery than others.
In recent months, the rapid growth in output from the UK’s manufacturing sector has led many to celebrate its resurgence.
In this article we take a look at UK manufacturing’s recent ups and downs, before explaining how the current production figures mask a number of underlying issues that will likely pose a future headache for creditors in the sector.
2019: Brexit Uncertainty Freezes Demand
Manufacturing was one of the hardest-hit industries during the UK Brexit deadlock of 2019.
In November last year The Guardian reported that UK manufacturing had seen six consecutive months of falling orders, thanks to reduced customer confidence.
Global demand for British goods was also hit, as concerns over logistics and supply chain reliability in the face of a potential no-deal Brexit set in.
Companies across a range of manufacturing industries began to lay off employees and started stockpiling materials.
Meanwhile, the IHS Markit Purchasing Managers’ Index (PMI) hit a low of 48.3 in September – if this figure is below 50 it indicates a contraction in the market.
2020: Coronavirus Pauses Recovery
According to data from the latest IHS Markit PMI, the UK manufacturing sector’s output fell further than those of the other major global economies during the coronavirus lockdown.
According to the figures, manufacturing output plummeted to an index of 32.6, representing a massive contraction.
However, this didn’t last long. The UK is now leading the global recovery in manufacturing along with Brazil and Germany, and has a PMI that exceeds 60.
In fact, output from the sector grew at its fastest rate since 2014 during August and saw the biggest increase in new orders since November 2017, with many coming from domestic markets.
Today: Growth Masks Underlying Issues
Reading the headlines, it would appear that the UK manufacturing sector is on a high.
However, the sector’s output hit record lows so it’s no surprise that the immediate recovery has been swift as manufacturers restart their operations.
Here are a few reasons why manufacturing is still a vulnerable sector:
1. Falling Employment
While production has substantially increased in recent months, employment in the sector has fallen for the sixth month in a row and at one of the fastest rates in over a decade. This suggests a rebalancing of the sector rather than a boom.
2. Costs Have Increased
Input price inflation was at its highest point for 20 months during August. The increased costs were related to supply chain issues and some materials and products not being available.
The costs of transporting goods and materials as well as unfavourable exchange rates have also been cited as issues. It is hoped that high costs will be a short-term issue linked to Covid-19.
3. Brexit Is Still to Come
With the ravages of coronavirus still fresh, Brexit now feels like a distant memory.
However, the truth is that the UK is still in a transition period and the full impact of leaving the EU won’t be felt until 2021, when the country finally ceases to be a member.
According to a report by the think tank UK in a Changing Europe, Brexit will most likely result in increased costs for manufacturers due to additional tariffs, customs declarations, certification border delays and more.
Many manufacturers are reliant on just a handful of customers, meaning that the sector is vulnerable to insolvent bad debt if large clients go into administration.
In the 12 months to 30 June 2020, insolvent bad debt in UK manufacturing was £105m – an increase of £25m since the 12 months to 30 June 2019.
In the previous quarter, insolvent bad debt spiked by 17%. In fact, 4% more manufacturing companies were pushed into significant financial distress during Q2 2020 compared to the same period the year before and there are now 20,088 companies in significant distress.
Protect Your Business
The manufacturing sector is not out of the woods yet.
With the government furlough scheme coming to an end in the next few months and the true impact of the recession still to set in, the UK is set to be hit by multiple waves of insolvencies over the coming years.
With their exposure to fractured supply chains and economic volatility, manufacturers and their customers are vulnerable to bad debt.
Red Flag Alert provides detailed financial health data on clients and suppliers so that you can agree appropriate credit terms and take action when necessary.
Red Flag Alert is powered by an algorithm that has evolved over decades to provide health ratings that are highly specific to each business. Billions of data points have been collected, and these vast datasets power our algorithm to make accurate predictions on business failures.