Manufacturing dip hits Sterling to new low

27th January, 2016

It’s the start of 2016 and what a turbulent start it has been in the financial sector. The oil price hit a new low, the Pound took a dive and the manufacturing struggle continues.

Manufacturing is Faltering

The UK manufacturing sector has been declining for the past few quarters; this has a huge effect on other UK sectors and strikes fear into other markets because the manufacturing sector covers about 10% of the UK economy.

Simon Wells, Chief UK economist at HSBC said: “The manufacturing sector is the biggest concern, where several surveys and official data point to a marked slowing in activity. Indeed, manufacturing is already in its third recession in less than a decade.”

UK manufacturing does battle against the powers of Asia, with both the Chinese and Indian super powers in the manufacturing sector. They have struggled in overseas markets as the pound’s dwindling strength makes their goods more expensive, even if it does make imports cheaper. Industrial production shrank 0.7% in a month which is a much higher drop than expected and the worst it has been since 2013. It isn’t just short term, manufacturing also made a disappointing effort in the last quarter overall, this not only unsettles investors in the sector but has also weakened the pound considerably. The manufacturing sector is still a full 9% smaller that it was prior to the crash in 2008.

In a survey by EEF (Engineering Employers’ Federation) they found that twice as many manufacturing companies said that the risks in 2016 outweigh the opportunities. The survey also found that 44% of manufacturers said their company face an uphill struggle and only 23% thought that the positives were outweighing the negatives.

As a result of this negativity there have been multiple closures like the SSI steel works near Middlesbrough at the end of last year. Another consequence is the axing of jobs like the Tata steel cuts in Scunthorpe and Lanarkshire, 34% of businesses in the sector said that restructuring their workforces was a priority this year. This isn’t aided by wage growth, increases in pension contributions and changes to the apprenticeship schemes.

The Great British Pound

The strength of the pound has been getting progressively weaker against the US dollar. As well as this the Euro has also been making ground on the pound. The GBP/USD has moved since the high at the end of October last year of 1.544 it is now at 1.425 which is a drop of 11 cents over the last 90 days. This makes almost everything more expensive from our point of view as a consumer. Imports are a lot more expensive although it does make our exports more attractive to the Americans and those using the Euro, which has also done well since November when the pound peaked at 1.43 and has now dropped to below 1.30 which is a 13 cent difference in the same period.

So what can we do?

Well the UK does have some aces up its sleeve, Although hard to track as the data collection methods are dated and only really useful for tangible exports. We are the second largest exporter of services in the world behind only the US. As these services are generally higher valued compared to the low cost manufactured items they should cover the gap that sector is creating. As other countries can easily out produce us and do it cheaper than us, we must specialise at what we are good at, which is providing Financial, Insurance and Business services to the world.

At least the vehicles we still produce on our tiny British isles are pretty special.....