How Will Brexit Aftershocks Impact The Manufacturing Sector?
While the low pound heralds a period of uncertainty for British manufacturers, clever firms can take advantage of the opportunities it brings.
On Friday 24 June, after months of hard-fought campaigning, the British public (by a slim majority of 52% to 48%) voted to leave the European Union. This momentous decision had immediate and widespread social, political and economic ramifications, including the resignation of the Prime Minister and, significantly for the UK’s manufacturing industry, the fall in value of the pound.
The Fall Of The Pound
The shock referendum result severely dented the confidence of the financial markets which led, in turn, to a sharp decrease in the value of the pound. At one stage, it fell over 11% to £1 = $1.28 – the lowest it’s been in 30 years. And while the pound has recovered slightly, it is still in a fairly weak position, especially against the dollar and euro.
This ongoing economic uncertainty is set to have a significant impact on both British firms and consumers, leaving many people to wonder if there could be turbulent times ahead for the UK manufacturing industry.
The low value of the pound certainly signifies a period of uncertainty, and there is a very real danger that it could impact adversely on UK firms’ bottom line. Those manufacturers who import from the EU or the rest of the world will see a significant rise in the cost of raw materials – with some companies predicting an average increase of 5%. With fairly lean profit margins, many companies are not able to absorb these extra costs and will find themselves in the unenviable position of choosing between taking a hit to their profits or raising their prices and passing the pain on to their customers – in itself a risky option.
What we need to consider is whether the fall in the pound is a temporary situation, or a longer term prospect. Over the shorter-term, most companies can cope with temporary fluctuations in price, but if the low value of pound is sustained, we are likely to see a longer-term impact on purchasing power when importing materials from abroad.
So that’s the bad news. But it’s not all doom and gloom. A low pound also has the potential to offer benefits and opportunities to UK firms.
While a weak pound is bad news for imports, companies who export goods outside of the UK will find themselves in a position to either increase their profit margins or sell their products at a lower price – and this decrease in price could well lead to an increase in demand from European and international customers.
Flexibility will be key to capitalising on this and those manufacturers who can switch their focus from domestic sales to foreign exports will be best placed to take advantage of the more competitive exchange rate. Whether they can do this successfully will depend on their market and how flexible they can be, and, given the wide breadth of applications associated with their products, labelling and packaging companies could find themselves in a very strong position.
And of course, it’s not just the strength of the pound that we need to consider. There are many other areas of Brexit which will impact on British businesses – and regulation is one of the key ones that springs immediately to mind. The EU has had a strong influence on how retailers label and package food and chemical products, but as Brexit takes hold these rules could well change and UK retailers will need to adapt their products accordingly. Again, this could be an exciting opportunity for packaging companies to win new business and increase sales.
Nobody can predict exactly how the manufacturing industry will be impacted by a weak pound and the fallout from Brexit. We are entering unchartered territory and there could well be some years of uncertainty and difficulty ahead. However, there are also undoubtedly opportunities for the manufacturing industry, and the sector is well-placed to weather the storm and come out stronger the other side.