Manufacturing and construction sectors air concern over rising import costs with companies facing ‘more risks than opportunities’ in 2017
a house under construction
Reports from the manufacturing and construction sectors point to sharp rise in prices for materials, including a 20% rise in timber costs.
Katie Allen
Monday 9 January 2017 00.01 GMT
British companies are grappling with higher costs and bracing for further pressure in the months ahead as the start of Brexit talks threatens to drag the pound down further and ramp up the price of imports to the UK.
Reports from the manufacturing and construction sectors on Monday point to a sharp rise in the prices paid for materials by firms in Britain and worries that their profit margins will be squeezed as they decide how much of those higher costs they can pass on to customers.
Manufacturers’ organisation EEF flagged up higher costs in its latest survey of 281 senior executives although it found companies were generally upbeat about their own prospects in 2017, with hopes for improved sales.
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In the report, the EEF said: “Companies have experienced a surge in input costs, which soared to multiyear highs. As the weak pound is expected to prevail, cost pressures will be gradually feeding through into higher consumer prices in the year ahead.”
Separate research by the Federation of Master Builders found 70% of the 232 UK construction companies it polled had recorded an increase in material prices owing to the pound’s fall since the Brexit vote.
Sarah McMonagle, director of external affairs at the group, said: “Thousands of smaller building firms are grappling with the rising cost of materials caused by the depreciation of sterling since the EU referendum.
“Anecdotally, construction SMEs [small and medium-sized enterprises] are already reporting an increase of 22% in Spanish slate and a 20% increase in timber. A quarter of all materials used by the UK construction industry are imported – this is significant and underlines the vulnerability of the industry to sudden fluctuations in the strength of our currency.”
Economists have warned that the pound faces further swings on foreign exchanges with the triggering of article 50, expected by the end of March, to kick off formal talks to leave the EU. Some predict the effects of the pound’s weakness will lift headline inflation in the UK from 1.2% on the latest reading to as high as 3% by year end.
The EEF’s poll noted pressures from other sources in 2017. With voters going to the polls in France, Germany and the Netherlands, as well as Donald Trump’s presidency marking a change of direction in US politics, a large proportion of manufacturers said their companies faced more risks than opportunities in 2017. Almost half, or 46%, said risks outstripped opportunities while 23% said there were more opportunities than risks.
EEF’s chief economist, Lee Hopley, said: “There is a real sense that there are way more risks than opportunities out there, obviously that is exacerbated by Brexit but we are not going to leave the EU in 2017.”
Hopley said that despite their worries and with big questions over what kind of trade deal the UK would end up securing, manufacturers were generally hopeful of better sales this year and were still investing in productivity improvements.
“The message we are getting from manufacturers is you can’t afford to sit on your hands for 18 months,” she said.
The survey also showed a rise in the proportion of firms that think the UK was a competitive place to base a manufacturing business in the next 12 months.
“For the next 12 months at least, respondents are positive, on balance, about the UK as a place to manufacture. Whilst this is encouraging, it could reflect perceptions about the current attractiveness of other locations, with unpredictability not just a UK phenomenon,” the report said.
Companies were less upbeat about their profitability as they get to grips with higher costs, Hopley said. The pound’s sharp fall since the Brexit vote has made imports such as fuel and metals more expensive. On the other hand, some firms have reported a boost to exports as the weak pound makes products and services cheaper in overseas markets.
The Construction Products Association (CPA) suggested its members had experienced higher prices and were expecting further increases. Among those companies that made “heavy side” materials such as steel and bricks 78% reported an increase in annual costs. Among those making “light side” products such as insulation and lighting, 71% had seen an increase.
Rebecca Larkin, a CPA senior economist, said: “Rising costs of imported raw materials continue to be a primary driver of cost inflation, but there is now an indication that currency weakness is filtering through to higher energy and fuel costs too.
“The impact of Brexit on the construction industry is, as yet, unclear, but it is unlikely this year will be as buoyant as last unless government is able to provide greater certainty and the industry is able to manage cost pressures.”