GearsThe performance of the UK manufacturing sector is one of the key indicators of the health of the UK economy as a whole. To what extent is the current stagnant growth in that sector a result of the impending EU referendum?

The Markit/CIPS manufacturing Purchasing Managers’ Index fell to 49.4 in April 2016, its lowest level since early 2013. The index measures the growth in the manufacturing sector; a figure of less than 50 indicates that the sector is in recession. The index recovered to 50.1 in May, however, many are concerned that the manufacturing sector is currently at a standstill.

The sector also remains below its pre-crises peaks, unlike other sectors (such as the services sector) which are now well above their pre-2008 level. Recession or stagnation within the sector is a troubling sign, given that manufacturing accounts for approximately 10% of the UK’s GDP, meaning that it can act as a drag on wider economic growth, increasing the pressure on the service sector to drive overall growth. In headline cases such as the collapse of SSI, mass redundancies can have a devastating impact on a particular geographical area which can take years to recover from, as well as the inevitable impact on dependent suppliers.

Some of the sector’s problems have been reasonably long-standing, such as the strong pound making UK investment from overseas investors less appealing, as well as making UK exports more expensive for overseas buyers. In addition, manufacturers who supply products to the oil sector have been affected by the decreased demand from that sector due to the low price of crude.

However, one issue in particular is often cited by manufacturers as impacting on their business – the looming EU referendum.

A survey by Markit found that approximately one third of UK manufacturers surveyed believed that uncertainty over a possible Brexit has had an impact on their business, with 8% of respondents of the view that the impact was “strongly detrimental”.

Squire Patton Boggs’s annual Manufacturing report found that 83% of respondents wanted to see the UK remain part of the EU, with many citing the fact that the EU remains UK manufacturers’ largest single trading partner.

In the event of a Brexit, manufacturers may have to contend with (1) volatile currency markets, (2) the possibility that certain countries may put trade barriers in place for UK goods and (3) that some buyers within the EU may choose to buy their goods from a supplier within the EU rather than continue to use a supplier outside of the EU structure. Those uncertainties may have caused manufacturers to put their investment and hiring decisions on hold pending the outcome of the referendum and any resulting fallout. In addition, overseas customers may be holding off placing large orders with UK manufacturers until the outcome of the referendum (and therefore the basis on which they trade with those manufacturers) is known.

It is easy to see how potential risks such as those cited above are leading to considerable uncertainty within the sector, with the inevitable impact on output. However, whether the upcoming referendum is in fact having a significant impact on the manufacturing sector will only be known following further analysis in 6 or 12 months’ time. In the event that the outcome is to Bremain and the sector does not pick up, then it would appear that the  sector is being affected more by underlying issues such as currency strength and overall demand, as opposed to uncertainty about the UK’s future relationship with the EU.