Brexit in Action: UK Manufacturing Gains Momentum, Investment Slides

Brexit aftereffects have started to weigh on the UK’s investment due to policy and political uncertainties, while domestic manufacturing is gaining steam due to the pound’s devaluation.

Kristian Rouz – After the New Tory cabinet of Theresa May announced last week the UK will leave the European Union by April 2017, suggesting a ‘hard Brexit’ scenario, the national currency plunged, and the most leveraged and exposed to international headwinds market participants panicked, stirring rife speculation of the future of the British economy. The macroeconomic data arrived this week have provided a mixed short-term outlook.

With total investment slowing due to the uncertainty over the path of separation between the UK and the EU, manufacturing has rebounded, fueled by the hopes of rising prices on the imported goods. In the longer term, the UK is positioned to follow Germany’s lead with its economy based on manufacturing, while the weaker pound is a longer-term reality, with pound-dollar parity possibly within reach, depending on who wins the US election.

"The Prime Minister has given businesses some clarity on the timetable for Article 50, and on short-term regulatory and legal issues,” Adam Marshall, director with the British Chamber of Commerce (BCC), said. “This is helpful, but needs to be followed up by a firm demonstration that the government has a clear and coherent strategy to defend the UK’s economic and business interests in the negotiations that lie ahead.”

The BCC’s Quarterly Economic Survey for 3Q16, released on Monday, has shown the UK’s manufacturing has significantly improved its positioning in both domestic and international markets throughout the “Brexit quarter” (July-September 2016). The UK’s exports expanded, a massive development for the economy which has been mired in trade deficits for years. The services sector took a blow, as did investment.

According to the report, the manufacturing exports index rose to +17 in Q3 compared to +9 in Q2. Domestic sales of the UK-made goods index rose to +13 from +9, however, advance orders slipped to +7 in Q3 from +9 in Q2, the shaken consumer confidence is to blame. The pace of hiring in manufacturing has accelerated to +15 from +12, while in the services the measure reflected a contraction to +14 from +19.

“While many manufacturers have seen something of a bounce this summer, the UK's services sector has slowed significantly, and our data suggests that slower growth is likely in the months ahead,” Marshall said.

However, the projected slowdown in growth, should it happen after a broader economic acceleration during the past months, would be a result of the declining investment.

“The EU is Britain’s most important trade partner. Trade barriers with the EU would rise and this will hurt Britain’s investment and growth,” Oliver Hart, the English Nobel Prize-winning economist, said.

In a separate interview with Chicago Tribune in August he said, “the post-Brexit agreement between the UK and the EU is likely to involve trade barriers. This will reduce gains from trade. The UK will suffer.”

According to data by the Observatory on Economic Complexity (OEC), the UK’s top export destinations are the US ($51 bln), Germany ($46.5 bln), the Netherlands ($34.2 bln), Switzerland ($33.6 bln), and France ($27 bln). Import originators are Germany ($100B), China ($62.7B), the Netherlands ($50.7B), the United States ($44.4B) and France ($41.5B).

This is the reason the UK’s government has recently intensified its effort to negotiate trade agreements with the US and Australia, as well as to join the European Free Trade Association (EFTA), currently consisting of four nations: Iceland, Liechtenstein, Norway, and Switzerland. With the upcoming US elections, the UK-US separate trade deal (outside of the Democrat-favored TTIP) would be a likelier possibility under a Donald Trump administration, while Australia would be willing to strike a deal with the UK in case the Trans-Pacific Partnership (TPP) fails to come through – again, a more feasible option under a Republican administration in the US. In many ways, the future of the post-Brexit Britain depends on the shifts, if any, in the White house.

Meanwhile, in the short term, due to the pound’s plunge, the UK’s inflation is bound to accelerate, supporting the broader economic expansion. A threat of disinflation, a persistent challenge to the Eurozone and Japan, is off the table in Britain, whose economy is becoming increasingly dynamic, albeit volatile.

“We will be supporting the government through this complex and difficult process, helping them analyze how increased cost pressures on retailers could mean higher shop prices and identifying any opportunities for new trade deals that could benefit individuals and families,” chairman of the British Retail Consortium (BRC) Richard Baker said.