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12 Jun 2019

UK Sees Biggest Decline in Manufacturing Since 2002

According to latest figures from the Office of National Statistics (ONS), production output in the UK dropped by 2.7% in April from March, and GDP fell by 0.4% in just one month. The manufacturing sector provided the largest contribution to the downturn, with the index plunging 3.9% in April, its biggest monthly fall since June 2002.

Remainers seized on the ONS data as being evidence of the crushing impact of Brexit on the British economy. The Guardian called it a “Brexit hangover” while a headline in The Independent shrieked that a “Brexit paralysis” has set in after the economy “shrinks by four times as much as predicted.”

However, the feeling among analysts is that the decline in manufacturing was inevitable after the Brexit deadline of March 29th came and went without activity. This was largely due to firms stockpiling record inventory levels for months approaching the original March deadline, which caused production to increase, creating a “false positive” in the previous month’s data.

When taken in isolation, the April figures may indeed seem disastrous for the British economy although the moving average tells a different story. This chart shows a big boost from the end of 2019 through to March (stockpiling) and a dramatic fall off in April which is almost certainly due to the missed Brexit deadline.

Automakers Hardest Hit by Recent Downturn

The hardest hit sector during April’s downturn, the transport equipment industry, which encompasses motor vehicles, trailers and semi-trailers, saw its manufacturing output plunge by 24%. It’s the largest monthly fall since January 1974 when the UK economy was reeling from the effects of a major global oil crisis. But if you average the data out over the three months from February through April, the contraction is a much less dramatic 2.7%.

These manufacturers had scheduled months ahead of the March 29 hard-Brexit date a shutdown of their manufacturing operations to last a week or more over fears they could not get parts and components from the EU in time, due to border chaos. When Brexit was delayed at the last minute, it was too late to un-schedule the scheduled shutdown.

The three automakers with the largest manufacturing base in the UK — BMW, Jaguar Land Rover, and Honda — had announced in early April that they would close their factories in April from between a week to up to a month to mitigate potential disruption from a no-deal Brexit.

And while auto manufacturing is certainly down in the UK — its output has been falling for 11 straight months — it’s largely the result of slowing demand in key international markets, including the EU, China and the US, as well as the collapse of diesel vehicle sales in the UK. Jaguar Land Rover has been agonized by these conditions for a while.

Brexit Failure Shoots British Industry in the Foot

Other manufacturing sectors that performed poorly in April had followed similar strategies to avoid getting caught in border chaos. In April, output in the pharmaceutical products industry shrank by 8.7%, among chemical producers by 5.8%, and among metal producers 4.1%. But like other manufacturers, they had increased production volume sharply in preparation for Brexit chaos that then never came.

Pharmaceutical companies, like automotive manufacturers, spent the months leading up to the UK’s scheduled withdrawal date of March 29 frantically stockpiling goods and trying to bring forward orders. Some manufacturers even brought forward production stoppages normally scheduled for the summer holiday period to April in the hope of minimizing the impact of the UK’s departure from the customs union and single market.

When the withdrawal date was postponed, first to April 12, then to the end of October, many of those companies had fewer orders to fulfill and used some of their stockpiled goods to meet the orders they did have. Manufacturers that had opted to bring their summer shutdown forward suddenly found that not only did they unnecessarily lose millions in forgone production in April but their vulnerability to future shocks has also increased, since it will be much harder for them to justify planning another shutdown for the next deadline, in four and a half months’ time.

This is just one example of the huge costs of the acute uncertainty unleashed when the UK government and parliament decided not to leave the EU on March 29. If anything, the uncertainty is greater today than it was at any other time. Logistics firms on both sides of the English Channel have spent (and earned) billions of pounds and euros helping companies get ready for Brexit, but now no one — not even the UK government — knows whether there will be a Brexit, what form it will take, or when it will happen, if indeed it does.

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