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Domestic orders creating a ‘false boom’ for UK manufacturing

Manufacturing surveys show that order levels have overtaken exports for the first time since 2016, but this is mainly due to a Eurozone slump and stockpiling activity ahead of Brexit.

According to the latest quarterly survey by Make UK (formerly EEF) and business advisory firm BDO LLP, output for Britain’s manufacturers remains stable and is sitting higher than the long-term average.

However, for the second quarter in a row, output balances were much higher than orders, hinting that at least part of the production is related to stockpiling activities rather than actual demand coming from customers.

Export numbers have been unable to pick-up since a sharp drop in the last quarter of 2018, meaning that domestic orders have overtaken exports for the first time in more than two years.

Although Europe continues to be the top market opportunity for manufacturers, for the first time since 2016 the balance of demand coming from Europe is lower than 50 per cent. This drop is tied to Brexit uncertainty, with concerns that goods may be stuck at ports and also a more general economic slowdown happening across Europe.

The survey’s conclusions are confirmed by the latest monthly UK Manufacturing Purchasing Manager’s Index (PMI).

The index, compiled by IHS Markit and the Chartered Institute of Procurement and Supply (CIPS), shows that companies stockpiled raw materials at a record pace in February in an effort to build stocks of finished products in advance of Brexit. Pre-production inventories rose to the greatest extent recorded to date, after also hitting a record high in January.

Manufacturers also cut back on employment for the second consecutive month, with the rate of job losses now the steepest since February 2013.

Make UK’s Chief Economist, Seamus Nevin, commented:

“Whilst the [latest] figures show the sector is still in positive territory, this is mainly thanks to companies building large stockpiles of goods. These activities have broken another record and confirmed how preparatory activities for a potential no deal Brexit are running on all cylinders and creating a false boom.

“On the other side of the Channel, Eurozone manufacturing went into its deepest downturn for almost six years as trade war worries, slowing global growth, and the UK’s imminent exit from the EU all hit demand. The slump, which is being led by Europe’s powerhouse Germany as well as France, Spain, and Italy, will worry British businesses.”

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