COVID and Brexit-hit supply chains lead to 'sharp rise' in UK manufacturing costs

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Workers on the production line at Nissan's factory in Sunderland, UK. Photo: Owen Humphreys/PA via Getty Images
Workers on the production line at Nissan's factory in Sunderland, UK. Photo: Owen Humphreys/PA via Getty Images

Price inflation continued to be a concern in the UK manufacturing sector in July, as stretched supply chains— hit by complications from both COVID-19 and Brexit — led to a sharp rise in costs.

According to IHS Markit's monthly purchasing managers' index (PMI), raw material, staff and skill shortages were all major factors stymieing output growth and contributing to a further marked increase in input purchasing.

Solid jobs growth continued, but the rate was insufficient to prevent a further increase in backlogs.

Logistic delays caused by stretched international supply chains meanwhile led to a further marked lengthening of supplier lead times during the month. Raw material shortages, disruption caused by COVID-19 and Brexit and capacity issues across the distribution network (including delays at ports, freight and shipping services) also contributed to delivery delays.

Watch: The Brexit impact so far

With demand outstripping supply, price pressures continued to grow during July. Average input costs rose at a near survey-record pace, with over 72% of manufacturers seeing an increase.

"As manufacturers begin to lose faith in just how transitory these inflationary pressures will be these increased costs are being passed on to their customers to relieve dwindling margins," said James Brougham, senior economist at Make UK.

"It’s now all but certain that we will now see these inflationary pressures in the production industry pervade further into consumer inflation in the coming months.”

Meanwhile, supply chain issues are being felt across the sector. The Road Haulage Association (RHA) reported on Thursday that there is a shortage of 100,000 drivers and warned the situation has reached a “crisis point” with critical supply chains failing.

It said that many drivers have gone back to their home countries either due to uncertainty over new Brexit rules, or because of UK’s COVID-related lockdown restrictions. Many have not returned.

On top of this, HGV (heavy goods vehicle) drivers are made up of an ageing population that is retiring; and there is a major backlog of tests needed to be taken before drivers can qualify to operate lorries, because the tests were put on hold during the pandemic.

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"On one hand, manufacturers are benefiting from reopening economies. This is leading to solid inflows of new work from both domestic and overseas markets, including the US, the EU, China and the Middle-East," said Rob Dobson, director at IHS Markit.

“On the other, the recent surge in global manufacturing growth has led to another month of near-record supply chain delays, exacerbated by factories and their customers building up safety stocks.

"Some firms also noted that post-Brexit issues were still a constraint on efforts to rebuild sales and manage supply and distribution channels to the EU."

Despite this, the UK manufacturing upturn remained solid in July. Although rates of expansion in output and new orders slowed, they remained among the best in the survey history amid robust sales to both domestic and export clients.

The seasonally adjusted IHS Markit/CIPS PMI posted 60.4 in July, down further from May's record high of 65.6.

Growth slowed across the consumer, intermediate and investment goods industries.

Read more: Why is the UK facing a HGV driver shortage and what could it mean for consumers?

Manufacturing production rose for the fourteenth consecutive month in July, as companies benefited from increased new order intakes, rising client confidence and the re-opening of the economy.

New business inflows reflected stronger demand from domestic and overseas markets, Markit said. There were also reports of clients bringing forward purchases to guard against supply-chain issues.

That said, rates of growth in both output and new work both eased to four-month lows.

Companies reported improved demand from the US, the EU, China, Russia and the Middle-East, although some noted that Brexit issues constrained exports to the EU.

Watch: Will interest rates stay low forever?

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