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UK surveys confirm likely negative effect of Brexit over next six months

Author : Alan Franck, Editor, Hazardex

21 July 2016

Following the EU referendum, UK manufacturers’ organisation EEF conducted a survey of companies to assess the impact of the decision to leave the EU which found a potentially negative impact on orders over the next six months. This trend was confirmed in the purchasing managers’ index (PMI) compiled by Markit, which saw its composite (services and manufacturing) index fall to an 87-month low.

The EEF survey found that there had not been much immediate impact on trading conditions across the manufacturing sector with most respondents reporting that they had seen no change in orders or enquiries or that it was too soon to say. However, there were concerns that weakening economic activity in the UK and a potential pause in Europe's recovery would have a negative impact on orders over the next six months. This, however, could be offset by continued growth in sales to non-EU markets.

Key risks identified by respondents included exchange rate volatility (75%), political uncertainty (65%), expectations of increased costs (59%) and weaker demand (49%). Only 5% of firms did not identify any risks to their business in the year ahead, the EEF report said.

On the other side, over half of the respondents (53%) saw the weaker pound as an opportunity. A third of manufacturers (32%) reported rising input costs, with over half (51%) expecting this to be the case over the next six months.

When each of the risks, opportunities and uncertainties were taken into account, 58% of respondents said they would be reviewing their UK recruitment and 57% would be reviewing UK investment.

While 43% of companies’ investment plans will continue unchanged, just under four-in-ten firms (38%) expect to be investing less in the UK over the next year.

“All of our forecasts now point to our sector remaining in recession until at least the end of 2017. This means that, more than ever, we need government to keep a firm and steady hand on the tiller," said Terry Scuoler, chief executive of EEF.

The Markit PMI figures show services have been more badly affected than manufacturing post-Brexit.

Chris Williamson, the chief economist at Markit, said: “July saw a dramatic deterioration in the economy, with business activity slumping at the fastest rate since the height of the global financial crisis in early 2009.

 “The downturn, whether manifesting itself in order-book cancellations, a lack of new orders or the postponement or halting of projects, was most commonly attributed in one way or another to Brexit.

“At this level, the survey is signalling a 0.4% contraction of the economy in the third quarter, though much, of course, depends on whether we see a further deterioration in August or if July represents a shock-induced nadir. Given the record slump in service sector business expectations, the suggestion is that there is further pain to come in the short term at least.”

The latest Bank of England report was more positive, however, showing resilience in the first few weeks since the Brexit vote with no general signs of the economy slowing down. The monthly survey by the Bank’s regional agents found that a majority of firms questioned were not planning to mothball investment or change hiring plans.

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