About this Biggest Plunge Since 2002 in Manufacturing in the UK

It was a doozie, but it shouldn’t have come as a surprise. Here’s why.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

Production output in the UK dropped by 2.7% in April from March, and GDP fell by 0.4% in just one month, according to the latest figures by the Office of National Statistics. The manufacturing sector provided the largest contribution to the downturn, with the manufacturing index plunging 3.9% in April, from March, its biggest monthly fall since June 2002. In April, after three months of sharp increases, it had almost finally reached its pre-Financial-Crisis peak. The plunge in April took the index down 0.8% for the 12-month period, and took it back to 2017 levels.

The data was seized upon by pro-remain media outlets as evidence of the crushing impact of Brexit on the UK economy. The Guardian called it a “Brexit hangover” while a headline in The Independent shrieked that a “Brexit paralysis” has set in after the economy “shrinks by four times as much as predicted.”

But it was always inevitable that April, the month after the official, and now come-and-gone, Brexit date of March 29 would be a bad month for the UK economy. Companies had stockpiled record amounts of inventories for months on end ahead of the Brexit date, which would naturally cause production and business and the economy in general to increase before Brexit and plunge for about a month or two after.

The April figures, if taken in isolation, may seem semi-cataclysmic and perhaps even deserving of the doom-and-gloom laden vernacular employed by certain media, but the three-month moving average shows a different story: A big boost from late 2018 through March, and then a dip in April that unwound only half of the prior month’s gain:

The hardest hit sector during April’s downturn, the transport equipment industry, which encompasses motor vehicles, trailers and semi-trailers, saw its manufacturing output plunge by 24%. It’s the largest monthly fall since January 1974 when the UK economy was reeling from the effects of a major global oil crisis. But if you average the data out over the three months from February through April, the contraction is a much less dramatic 2.7%.

These manufacturers had scheduled months ahead of the March 29 hard-Brexit date a shutdown of their manufacturing operations to last a week or more over fears they could not get parts and components from the EU in time, due to border chaos. When Brexit was delayed at the last minute, it was too late to un-schedule the scheduled shutdown.

The three automakers with the largest manufacturing base in the UK — BMW, Jaguar Land Rover, and Honda — had announced in early April that they would close their factories in April from between a week to up to a month to mitigate potential disruption from a no-deal Brexit (we reported on this).

And while auto manufacturing is certainly down in the UK — its output has been falling for 11 straight months — it’s largely the result of slowing demand in key international markets, including the EU, China and the US, as well as the collapse of diesel vehicle sales in the UK. Jaguar Land Rover has been agonized by these conditions for a while.

The automotive manufacturing sector is only a relatively small part of the UK economy. Some European economies are getting hit even harder by the auto slowdown, in particular Germany whose outsized dependence on auto manufacturing for exports quickly becomes a source of weakness when the auto sector goes into decline globally, as is happening right now.

Other manufacturing sectors that performed poorly in April had followed similar strategies to avoid getting caught in border chaos. In April, output in the pharmaceutical products industry shrank by 8.7%, among chemical producers by 5.8%, and among metal producers 4.1%. But like other manufacturers, the had increased production volume sharply in preparation for Brexit chaos that then never came.

Pharmaceutical companies, like automotive manufacturers, spent the months leading up to the UK’s scheduled withdrawal date of March 29 frantically stockpiling goods and trying to bring forward orders. Some manufacturers even brought forward production stoppages normally scheduled for the summer holiday period to April in the hope of minimizing the impact of the UK’s departure from the customs union and single market.

When the withdrawal date was postponed, first to April 12, then to the end of October, many of those companies had fewer orders to fulfill and used some of their stockpiled goods to meet the orders they did have. Manufacturers that had opted to bring their summer shutdown forward suddenly found that not only did they unnecessarily lose millions in forgone production in April but their vulnerability to future shocks has also increased, since it will be much harder for them to justify planning another shutdown for the next deadline, in four and a half months’ time.

This is just one example of the huge costs of the acute uncertainty unleashed when the UK government and parliament decided not to leave the EU on March 29. If anything, the uncertainty is greater today than it was at any other time. Logistics firms on both sides of the English Channel have spent (and earned) billions of pounds and euros helping companies get ready for Brexit, but now no one — not even the UK government — knows whether there will be a Brexit, what form it will take, or when it will happen, if indeed it does.

Companies have little choice but to spend large resources in terms of time, money, and lost opportunity in preparing for complex eventualities that may not end up materializing. The longer this goes on, the more harm it will do. Now another pile of the money is being spent on contingency planning for the next Brexit deadline, which may get punted further into the future anyway. While a no-deal Brexit is still the default option and could be the preferred choice of the next prime minister, the temptation to further extend the deadline as the big day approaches, in classic can-kicking style, will grow.

it will be tough to break the impasse, which is largely the result of the intense unpopularity of the proposed Withdrawal Agreement among both ‘remain’ and ‘leave’ camps. As this uncertainty drags on, the cost, in terms of economic pain for UK-based businesses that are having to prepare for this uncertainty, is likely to be huge. By Don Quijones.

Kier shares are one of the biggest holdings of Woodford Equity Income fund. Read…  Another UK Outsourcing Giant Teeters, Collapsed Shares Add to Woes of Woodford Fund that Just Froze Withdrawals

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  30 comments for “About this Biggest Plunge Since 2002 in Manufacturing in the UK

    • Wolf Richter says:

      Yes, Ford too, in Wales. But the UK has lucked out so far. Ford, GM, and others have announced wave after wave of plant closings in the US and elsewhere, starting in late 2016.

  1. Rowen says:

    I have the utmost confidence in BoJo righting the Kingdom.

    • Nicko2 says:

      Bojo will ensure a Labour majority, so that’s a silver lining.

      • d says:

        What have you been drinking.

        Putting the Stalinist in No 10 with the Scots crankie pulling his puppet strings will make the current Anarchy and Parliamentary insurrection lead by Bercow seem like child’s play.

        For England. A disaster of epic proportions would be inescapable.

        If England goes, the City goes, if the City goes, the majority of the global financial system would probably go with it.

        That big Derivative implosion so many of of you like to twitter about, and have been salivating about for over a decade, would probably be part of the implosion of the City, its where most of them are written.

        Think about what you wish for, lest your wishes, be granted.

    • Jim Bore says:

      I’m still amazed that BoJoke can become PM. Normally a complete fall-flat-on-your-face stint as FM would kill such chances. But, these are weird times.

      • d says:

        Did he fall, or was he like Dear Theresa, who was foolish enough to catch dodgy Daves Hospital pass, repeatedly, deliberately, tripped and pushed.

    • Willy2 says:

      – The UK is a “basket case” when I look at the economic data. And even BoJo won’t be able to change the downward trajectory of the UK.

  2. John says:

    More to with the Climate Change Act, taxes and regulations
    Also diselgate and the fact Europe is going to ban the ICE. The fall in world demand is the perfect storm.
    Sod all to do with leaving the EU.

  3. John Hope says:

    Okay here’s the plan : we take that great fat oaf and drop him in the English Channel about ten miles off the coast with lead weights attached to his overweight body and hopefully he doesn’t rise to the surface .

  4. James Levy says:

    The very dull and practical problem I have with the “Leave” school of thought is simple: what does Britain have and/or make that other countries are just dying to buy? Other than crooked financial swindles, what does the UK have to offer? I lived in the UK and got my Ph.D. there. I love that nation. But it lives above its means by money laundering and recirculating the money of tax cheats. That’s the bedrock of the pound sterling. If that’s the kind of society you want to live in, you could move to Panama or the Cayman Islands. I doubt it’s a viable option for a nation of 56 millions.

    • Old Engineer says:

      I have thought from the beginning that Brexit would just get talked to death. But the Northern Ireland issue makes Brexit almost impossible. The only part of Brexit the Torres want is to keep out foreigners. To do that a hard border must go up between Ireland and UK occupied Northern Ireland. Which means Northern Ireland economy tanks again and the IRA returns with a vengeance. And would they ever trust a UK agreement again?
      City of London’s money laundering is all that is keeping them afloat now. And it will continue since it is the only laundering service the US allows to exist (Congress has to have somewhere to stash their brib…er donations.

      • d says:

        If you research it

        its the EU that is DEMANDING A HARD BORDER IN ALL BUT NAME in ireland as all Animals coming into the EU MUST be veterinary inspected. At point of entry.

        The EU could have solved this problem simply by tuning freedom of Movement (which they still wish to do any themselves any way) and resolving the Illegal immigrant issues.

        Instead the EU weaponised the Illegal immigrants, to ensure a vote to BREXIT was the referendum result.

        Within days of the vote to Brexit taking place, the Illega immigrant camps in france were, all dismantled. As the EU Junker clan, had the referendum result they wanted.

        EU intend and has always intended to make Brexit as difficult and damaging as it can for England, as an example to all the other “we want out” weaker Eu states and groups.

        Banier is on Record.

        “If I make the withdrawal deal so bad the English no longer wish to leave the EU I will have done a good job.”

        If England Leaves under No deal, in October, Germany is going into recession.

        Germany PAYS the EU Bills.

        A Hard Border will be built in ireland AT THE DEMAND OF THE EU.

        And wright now Eu is still screaming YOU MUST PAY 39 B Eur and the WA is NOT NEGOTIABLE.

        This is what the French did to Germany in 1919 You Might remember where that DIKTAT took Europe. A similar group control the EU and are Making the WA DIKTAT, today.

        So who is it that really wants a NO DEAL Brexit???

    • Black Adder says:

      I enjoy watching real football. If you watch a match from Germany, the constant adverts along the field advertise manufacturing. Stuff from cars to ball bearings. If you watch a match from Italy, you see consumer products heavily advertised. Some cars, but fashion brands and sunglasses from what I can gather.

      If you watch a match from England, the pitch-side advertising is for bookies, and cybercoin dealers.

    • Leser says:

      It’ll take more than freer trade to replace as a major GDP contributor being the planet’s eminent money laundering hub – which by the way is not so much enabled by the skill of the involved bankers, lawyers and accountants, but rather by the witting protection of that “special relationship”.

  5. PaulJ says:

    UK just do it. Stop playing EU games. Oh and don’t pay the EU a cent.

    • David Calder says:

      Set a precedent for Greece to follow..

    • Gershon says:

      The oligarchy doesn’t want BREXIT, which means its Quislings in the Establishment political parties don’t want it either. The will of the British people means nothing.

    • Black Adder says:

      Because stiffing people you owe money to is the best way to build international respect.

  6. njbr says:

    The cost of uncertainty.

    Self-inflicted, no less.

    Now, where else is that happening ???

  7. Broken says:

    Just people being stubborn and placing a hold on their non- essential retail activity. Fed up with politicians.

    For a perspective on Brexit and the intention of Theresa May – analysis over the last 300 years of prime ministers of the UK looking at the number of days with no UK prime minister in post during change of leader shows the following:
    – the last 20 prime ministers managed a smooth handover and had a gap of either one or zero days.
    – 28 PMs had zero day handovers.
    – 12 PMs had one day handover.
    – 72 PMs had a handover of less than 20 days and 3 didn’t.
    What Theresa May has proposed is to leave the UK without a leader for between 45 -50 days. Only one prime minister left the post vacant for a longer period than Theresa May. It was Spencer Compton in 1743 who served continuously in Government from 1715 until his death.
    THIS Intentional willfull void inviting chaos. Two fingers to business community, to householders, to tax payers. Why should Brits pay tax at all since banks create it out of thin air? Civilisation is breaking.

    “Socrates: Have you noticed on our journey how often the citizens of this new land remind each other it is a free country?
    Plato: I have, and think it odd they do this.
    Socrates: How so, Plato?
    Plato: It is like reminding a baker he is a baker, or a sculptor he is a
    Socrates: You mean to say if someone is convinced of their trade, they have no need to be reminded.
    Plato: That is correct.
    Socrates: I agree. If these citizens were convinced of their freedom, they would not need reminders.”

    • Leser says:

      The strategy behind the government’s handling of Brexit has been to delay, frustrate and ultimately derail any successful departure from the EU. The handover gap you mention is only consistent with it: ‘See how Brexit makes everything go down the toilet’? It all is to serve as a stark lesson not only to the Brits, but to any member of the club that wanting to leave is NOT a good idea.

      BoJo will pick up where May left, with a fresh face and a different suit, just as the people demand it from time to time.

    • GK says:

      But… she hasn’t left the post vacant at all. She’s staying in office until the Tories elect a new leader. Where are you getting this “45–50 days” figure from?

  8. Paul says:

    By itself, that drop is insignificant.
    The best fit slope of the longer term data curve changes little, and it could simply have been a result of inventory accumulation of inventory the previous three months, which were unusually strong.

  9. Realist says:

    I wish the Brits good luck negotiating a trade deal with the US.

    • Saltcreep says:

      Should be easy enough. The UK negitiators should just go out and publicly say that they experienced the hardest bargain ever driven by a supremely accomplished counterparty, and have had to immediately retreat on many points and make many large concessions in order to try to secure a deal with the US.

      That should do the trick, I guess, and should allow any deal to pass quite easily, as well as secure an invitation to the White House for some long speeches of mutual admiration just ahead of the next French presidential visit.

    • Cassie says:

      What will shock Americans in their little bubble world is that the English regard American food as unsafe and won’t be happy about allowing the unrestricted imports that don’t meet the standards they are used to in the EU.

  10. Makes you wonder if this Brexit induced channel stuffing will create a faux recession, and how fa(ux)r will it spread?

Comments are closed.