The vitriolic aggression associated for so long with the UK’s decision to leave the European Union has largely dissipated. There is now a continuing and largely constructive debate about the true impact of Brexit on the key UK manufacturing sector, which accounts for around a tenth of GDP, especially in the near parallel context of the pandemic and its effects.
The economic picture of the UK manufacturing sector
The current sluggishness of the UK economy brings another element into this debate. The National Institute UK Economic Outlook – Winter 2023 published in February 2023 by the National Institute of Economic and Social Research (NIESR) looks closely at manufacturing and reveals that historically, when GDP slows, the industry slows by significantly more.
Following the immediate negative impact of the Covid crisis, overall UK manufacturing output surged in the latter part of 2020 and through into the early months of 2021, but then faded until these gains had been reversed by the middle of 2022. Output declined continuously for the five quarters to the end of 2022 and has dropped by more than might be expected in relation to the slowing of the economy.
The NIESR analysis concludes that the jury remains out on the longer-term effect of Brexit on the manufacturing, citing the erratic economic data on trade with the EU since Brexit as proof that so far there is a lack of evidence to suggest long term damage but a surfeit of indications confirming that there has certainly been severe disruption for what is now an extended period. Differentiating between the effect of the pandemic and of Brexit is proving to be difficult.
What are the negatives for UK manufacturing from Brexit?
Tariffs and border checks
The imposition of tariffs and border checks has disrupted supply chains and hit exports. Manufacturers who rely on imports for raw materials and components have been hit hard by these new barriers. With the UK no longer having access to the EU’s single market, businesses face extra costs to import and export goods, reducing their competitiveness in global markets.
Skilled labour shortages
Many sectors across the economy have been badly affected by the tight labour market of the past two years, facing major recruitment and retention challenges. A significant number of workers in the manufacturing industry have traditionally come from the EU. Brexit has made it difficult for them to continue working in the UK due to changes in immigration policies. The resultant labour shortages have led to a sharp rises in wage rates and recruitment costs, which has further squeezed manufacturers’ profit margins.
Investment uncertainty
The uncertainty surrounding Brexit has prompted some major manufacturers to delay decisions on investment and expansion, leading in some instances to falls in output. The automotive industry in the UK has experienced a significant decline in production due to the supply chain disruptions caused by Brexit. The industry relies heavily on just-in-time production methods, which are particularly vulnerable to delays at borders.
Equally, the UK’s aerospace industry has been affected by Brexit, with some companies moving production to other EU countries to avoid the added complications of customs and regulations. It was an ironic outcome when Dyson, controlled by Brexit proponent Sir James Dyson, decided to move its headquarters from the UK to Singapore, citing Brexit as one of the main reasons for the move.
Brexit upsides for UK manufacturing?
Boost to domestic production
Brexit may yet lead to an increase in domestic output as new regulations and standards are developed, which may make the UK an attractive jurisdiction to manufacture, promote high standards, reduce bureaucracy and stimulate innovative new ideas. The disruption to international supply chains and cost increases may also be the catalysts for some ‘re-shoring’ of production.
Potential access to new international trade agreements
The UK is now free to negotiate its own trade agreements, which could provide significant opportunities for UK manufacturers to enter new markets and build new business partnerships. Cynicism on this is widespread and progress on establishing meaningful new commercial treaties has been painfully slow to date. Nevertheless, this possibility remains.
Greater control over regulations
The UK can now introduce nuanced new and more favourable regulations tailored to its needs without having to adhere to the EU rules, giving manufacturers greater flexibility over such issues as production requirements or specifications. This could improve competitiveness under some circumstances.
Future Brexit impacts
At present, the downsides of Brexit appear to be more tangible than the positives but despite rigorous economic analysis and the passing of more than seven years since the decision to leave, the final judgment on the outcome for manufacturers is still some way in the future.
If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.