British manufacturers have ramped up their stockpiling efforts ahead of the new Brexit deadline at the end of the month, amid growing concerns over disruption to the UK economy.
According to IHS Markit and the Chartered Institute of Procurement and Supply (Cips), UK factory output was boosted in September by firms rushing to purchase goods and materials to avoid any potential border delays.
Despite the increase in stockpiling activity after a lull in activity over the summer, the survey showed that factory output fell for the fifth-month in a row, the longest downturn since the last recession in 2009.
The new rush to build up supplies ahead of Brexit helped to lift the IHS Markit/Cips manufacturing purchasing managers’ index (PMI) to 48.3 in September from a six-and-a-half-year low of 47.4 in August. However, it remains below the 50.0 mark that separates growth from contraction.
Rob Dobson, director at IHS Markit, said: “The impact of such Brexit-related stock building was dwarfed by weakening demand for other customers, due in part to clients routing supply chains away from the UK.”
Manufacturing output across the developed the world has slumped in recent months amid the continuing US-China trade war, which has sapped business investment and depressed export demand. Manufacturing output in the eurozone has dropped to the lowest levels in seven years, dragging major countries such as Italy and Germany to the brink of recession.
If the UK leaves the EU without a deal it would by default, become a “third country”, with no overarching post-Brexit plan in place and no transition period. The UK would no longer be paying into the EU budget, nor would it hand over the £39bn divorce payment.
The UK would drop out of countless arrangements, pacts and treaties, covering everything from tariffs to the movement of people, foodstuffs, other goods and data, to numerous specific deals on things such as aviation, and policing and security. Without an overall withdrawal agreement each element would need to be agreed. In the immediate aftermath, without a deal the UK would trade with the EU on the default terms of the World Trade Organization (WTO), including tariffs on agricultural goods. This has also been referred to by government ministers as an "Australia-style deal". Australia does not have a free trade agreement with the EU.
The UK government has already indicated that it will set low or no tariffs on goods coming into the country. This would lower the price of imports – making it harder for British manufacturers to compete with foreign goods. If the UK sets the tariffs to zero on goods coming in from the EU, under WTO “most favoured nation” rules it must also offer the same zero tariffs to other countries.
WTO rules only cover goods – they do not apply to financial services, a significant part of the UK’s economy. Trading under WTO rules will also require border checks, which could cause delays at ports, and a severe challenge to the peace process in Ireland without alternative arrangements in place to avoid a hard border.
Some no-deal supporters have claimed that the UK can use article XXIV of the General Agreement on Tariffs and Trade (Gatt) to force the EU to accept a period of up to 10 years where there are no tariffs while a free trade agreement is negotiated. However, the UK cannot invoke article XXIV unilaterally – the EU would have to agree to it. In previous cases where the article has been used, the two sides had a deal in place, and it has never been used to replicate something of the scale and complexity of the EU and the UK’s trading relationship.
The director general of the WTO, Roberto Azevêdo, has told Prospect magazine that “in simple factual terms in this scenario, you could expect to see the application of tariffs between the UK and EU where currently there are none”.
Until some agreements are in place, a no-deal scenario will place extra overheads on UK businesses – eg the current government advice is that all drivers, including lorries and commercial vehicles, will require extra documentation to be able to drive in Europe if there is no deal. Those arguing for a “managed” no deal envisage that a range of smaller, sector-by-sector, bilateral agreements could be quickly put into place as mutual self-interest between the UK and EU to avoid introducing or to rapidly remove this kind of bureaucracy.
In a sign of the continuing downturn in UK manufacturing, firms said that output, new orders, and export business all fell in September. Employment levels also fell at the fastest pace in six years, with around 8,000 jobs lost in September, up from around 6,000 in August.
Against a backdrop of mounting political turmoil in recent months, UK firms have begun redoubling their efforts to prepare for a potentially damaging no-deal Brexit at the end of October.
Greggs, the high street bakery chain, said on Tuesday it is taking steps to build up stocks of key ingredients and equipment that could be affected.
It has rented warehouse space and will begin stockpiling some longer-life products sourced from Europe, such as bacon and tuna. It has also begun sourcing all its cheese and most of its sugar in the UK to avoid potential disruption.
Greggs chief executive, Roger Whiteside, said the company would not be able to replace delicate foodstuffs such as tomatoes and lettuce and would have to switch to alternatives or stop selling products which used items held up by problems at ports.
Some firms have also started stockpiling beer, wine and spirits to keep the alcohol flowing at Christmas. Analysts have warned that the Brexit deadline comes as warehousing activity ramps up ahead of the festive season, making planning for both events harder for businesses.
Firms across the UK had rushed to stockpile before the original Brexit deadline on 29 March, providing a boost to economic growth earlier this year. Companies then opted to run down supplies after Theresa May delayed the deadline until the end of October, dragging down economic output, taking Britain to the brink of recession.
James Smith, an economist at the Dutch bank ING, said the boost was unlikely to be as significant the second time around, adding: “Inventory levels are still perceived to be fairly high, but also warehousing space is becoming more constrained given the close proximity to Black Friday and Christmas.”
