It’s been revealed that BMW (DE:BMW) will invest £600mn on updating its Cowley plant, near Oxford, to support the production of two new electric models – the Mini Cooper and the larger Mini Aceman.
Understandably, the proposed investment was lauded by government ministers, but there are still major concerns over the future of the UK’s automotive industry, not least because cars with batteries made outside either the UK or the European Union could face tariffs of around 10 per cent when shipped to mainland Europe.
The new rules governing supply chain content will come into force from next year unless the UK government and the European Commission agree to revise the relevant regulatory framework. At any rate, the commitment from BMW should only be seen in a positive light in and of itself, and it comes as the UK’s manufacturing sector has climbed one place to eighth largest in the world, according to the latest data published by Make UK (formerly the Engineering Employers' Federation).
Unfortunately, with recessionary risks to the fore and the S&P Global/CIPS UK Manufacturing PMI at its lowest ebb since May 2020, prospects are clearly unfavourable. The survey indicates that contraction rates for new orders and export business have been on a par with the pandemic and the 2007-08 global financial crisis. That’s a material problem given that the manufacturing sector accounts for 9.4 per cent of total UK economic output.
None of this is obviously encouraging, but it seems slightly at odds with the Make UK/BDO Q2 Manufacturing Outlook survey, which highlighted continued solid volumes in the domestic electronics industry, along with a pronounced increase in large orders for new aircraft as the aerospace sector benefited from the ongoing recovery in passenger miles.
The PMI figures also don’t chime with the experience of shareholders in some of the UK’s largest publicly traded manufacturing companies. Consider that the likes of Rolls-Royce (RR.), BAE Systems (BA), and GSK (GSK) have all posted share price gains over the past 12 months. In the case of Rolls-Royce - admittedly an ongoing recovery play - those gains amount to 184 per cent.
The Make UK/BDO analysis does, however, make it plain that the UK manufacturing sector still faces longer-term systemic challenges, including continued supply chain problems, skills shortages and strong labour demand, all of which stoke inflationary pressures. And tellingly, a separate survey compiled by the Chartered Institute of Procurement & Supply and S&P Global shows that manufacturing staffing levels in the UK were cut for the 11th consecutive month in August.
Following revisions, the Office for National Statistics (ONS) now thinks the UK economy regained its pre-pandemic size at the end of 2021, meaning that the recovery was as strong as in France and better than in Germany. If matters weren’t as grim as earlier assessments had us believe, it may be worth examining whether it could be time to increase exposure to the domestic manufacturing industry –- even if the threat of recession hasn’t receded.
The financial press has repeatedly commented on the relative resilience of the UK services sector, but the UK services PMI registered a score of 49.5 in August, implying the first overall reduction in output this year. It may be that successive rate rises are finally having the desired effect on aggregate demand, although the outcome across the wider sector was certainly mixed.
By the end of the first quarter, profitability analysis from the ONS covering public and private companies, along with corporate partnerships, indicates that the services sector's net rate of return was at an 11 per cent premium to the post-1997 average, whereas the rate for manufacturers represented a 19 per cent discount to the long-term average.
It would be unwise to suggest that long-term profitability rates in both the manufacturing and services sectors will automatically revert to the mean. The contraction in manufacturing order volumes is certainly linked to the gradual increase in borrowing costs and consequent efforts to reduce inventories. Studies have shown that the impact of rising interest rates is sharpest in areas where a larger share of output depends on durable goods, and therein lies the problem for manufacturers.
Yet eventually the challenges faced by the nation’s manufacturers will give way to an opportunity for private investors. UK interest rates are not expected to fall until mid-2024, but sentiment towards the broader sector will improve once it’s assumed that the base rate has peaked.
