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November 2016

Political and economic uncertainty takes its toll on the manufacturing sector

Published: Friday 18 November 2016

Business confidence in the manufacturing sector has fallen again, according to the latest Business Outlook Survey from Markit. When we last reported on confidence in the manufacturing sector in September, there were warnings from market experts and advisors that this lack of confidence was set to continue, as a result of exchange rate volatility and global political and economic uncertainty.

We warned that now, more than ever, manufacturers need to protect their profits from the risks that come with continued uncertainty and volatile currency markets. At the time, sterling was at a 30-year low against the US Dollar, and the figures in November paint a similar picture. David Johnson, Director at Halo Financial, commented:

“Difficult economic conditions mean that firms should shore up their currency activity to make much-needed savings in the current economic climate and build this into an ongoing business and risk management strategy. Preparation and planning are key to protect profits and performance.”

In September, the manufacturing industry confidence figures from the EEF and BDO survey showed that UK manufacturers’ average post-vote confidence was 5.24 out of 10, a drop from 6.37 before the referendum.

The Markit survey of over 12,000 manufacturers published in November shows a mixed picture worldwide, with lower optimism in the US and UK and a marginal uplift in confidence across the Eurozone, China, Japan, India, Brazil and Russia. This ties in with projected GDP for 2016 for the Top 20 global economies from the International Monetary Fund (IMF), which are, on the flipside, positive when the UK is considering its post-Brexit trade negotiations, as 15 of the Top 20 are outside the Eurozone.

Projected GDP 2016 and 2020 – Top 20 economies

Economy 2016 Nominal GDP ($ billions) Ranking by size 2020 Nominal GDP ($ billions) Ranking by size
US 18,561.930 1 21,927 1
China 11,391.620 2 16,458 2
Japan 4,730.300 3 5,506 3
Germany 3, 494.900 4 4,008 4
UK 2,649.890 5 2,928 6
France 2,488.280 6 2,851 7
India 2,250.990 7 3,297 5
Italy 1,852.500 8 2,046 9
Brazil 1, 769.600 9 2,214 8
Canada 1,532.340 10 1,856 10
Korea 1,404.380 11 1,747 11
Russia 1,267.750 12 1,698 12
Australia 1,256.640 13 1,574 13
Spain 1,252.160 14 1,457 14
Mexico 1,063.610 15 1,325 15
Indonesia 940.953 16 1,274 16
Netherlands 769.930 17 893.2 18
Turkey 735.716 18 912.5 17
Switzerland 662.483 19 744.8 21
Saudi Arabia 637.785 20 816.6 19
Argentina 541.748 21 773.4 20

What economic factors are having the biggest effect?

While manufacturers seem the most positive by sector in the report, the industry has had the biggest drop in confidence since the referendum. On the whole, UK companies seem more positive than those in France and Germany, given their upcoming elections, but less confident than Italy and Spain, who have their own political activity taking place.

There are many factors at play here, with political and economic uncertainty within the key trading partners of the UK, US and Europe creating ripple effects across the globe.
The Markit survey shows UK optimism figures at their lowest since 2012, when the economic crisis was still having a considerable effect on market and business confidence. The only exception to this downward trend was renewed confidence recorded in June 2015, following the UK General Election, when sterling was enjoying considerable strength against the Euro, in particular.

Brexit: challenges and opportunities

The UK’s decision to leave the EU and the uncertainty surrounding that process are continued concerns for companies, investors and markets as a whole. Sterling is struggling against all its major counterparts.
Brexit and exchange rate volatility were the key challenges listed by participants in the survey, with over 80% of participants who were interviewed listing these factors as the biggest threat to their business, and over 40% listing them as an opportunity, particularly when considering the positive effects of sterling weakness on UK exports.

The US Election: what next?

The US Presidential Election has caused similar uncertainty for the political and trade allies of the US and its currency partners, yet has had a positive effect on the country’s own currency.
In Asia, markets have fallen again while investors consider if the US will raise their interest rates.

Inflation, interest rates and economic performance

According to the latest Consumer Price Index (CPI) data from the Office for National Statistics (ONS), UK inflation fell to 0.9% in October from a figure of 1.0% in September, an unexpected difference from the figure of 1.1% that was forecast.

This fall in inflation has already had an effect on currency exchange rates – Sterling has weakened against all its key currency pairings upon the announcement of this news. After enjoying a brief but welcome boost against the Euro, the Pound fell by 1.1% against the Euro, as well as falling for another day against the US Dollar.

In contrast, the price of raw materials is up 12.2%, and a weakened Sterling puts the price of UK goods up once manufactured. According to industry experts, retail competition is helping to protect against inflation moving upwards. The implications of this are being felt in several industry sectors in the UK, particularly the manufacturing and services sectors. Continued inflationary pressures in 2017, reflecting Sterling weakness, are significant contributing factors to the uncertainty and lack of confidence in the sector.

The growing prices of materials and the associated cost pressures on manufacturers are expected to take their toll on their profitability, with firms expecting a reduction or lack of growth in profits as a result. “This is the area where a robust currency strategy and careful risk planning can make all the difference to a manufacturer’s bottom line,” points out David Johnson.

In Europe, figures from Germany published at the same time as the Markit report show a slowing of economic growth for Q3 2016, predominantly from weaker exporting figures.

Other challenges – and opportunities…

Other challenges raised by manufacturers in the survey included competition, marketing and sales focus.
New opportunities were identified through new equipment and product development, expansion into new markets, such as Mexico, South America and the Middle East, and improved marketing and digital capabilities.

About Halo Financial

Halo Financial is a leading UK foreign exchange brokerage, offering a comprehensive range of services to individuals and businesses since its inception in 2005. The business prides itself on offering a flexible and personalised approach for each of its clients, simplifying the seemingly complex foreign exchange market to maximise savings in currency transactions and make money go further.
Halo Financial specialises in managing currency risk by offering hedging strategies and best execution for B2B and B2C clients with vertical expertise in numerous industry sectors such as international trade, financial, education, migration and overseas property.  Staffed by qualified technical analysts, the company is authorised by the Financial Conduct Authority and HM Revenue and Customs.
Halo Financial also received the Gold award of Best Supporting Service at the OPP awards, the Gold Award for Financial Support and Innovation from Re:Locate Magazine and has 5 out 5 star customer gold merchant status rating via independent review website, Feefo.com