UK factories suffer as concern rises over inflation

October 24, 2021 - 19:54

TEHRAN - A survey by the Confederation of British Industry has shown UK manufacturers are struggling with their worst supply chain shortages since the mid 1970s. Fears are now growing in the sector over the financial fallout of rising costs and a lack of materials on the backdrop of Brexit and the coronavirus.

Almost two-thirds of the businesses that were surveyed have warned that in the next three months, a shortage of items will hit their factory’s output.

The research shows this is the biggest supply chain shortage since 1975, a year when inflation also hit a postwar high with severe economic woes in Britain as health workers went on strike and bin collectors staged industrial action.

The latest survey of 263 manufacturers reveals increasing concern over staff shortages and skilled staff shortages. Those who participated in the survey also cited rising fuel, transport and energy bills, alongside steep price increases for items in short supply.

About 64% of UK manufacturers reported a particularly steep rise in unfinished work, with the backlog rate at its fastest since June, the data showed. They also warned they are struggling to meet customer demand, while blaming falling export sales. A lack of skilled labor to keep factory production lines running has also been cited.

As manufacturers face challenging months ahead, information provider IHS Markit says companies have also been hit by a record rise in costs. 

Many countries around the world are facing challenging times as their economies emerge fractured from the coronavirus Pandemic, but the situation in the UK has been exacerbated by the government’s new post-Brexit trade and immigration rules. 

With slow economic growth and concerns that severe disruption could ruin the Christmas holiday season, the government has drafted in former chief executive of Tesco, David Lewis, for advice on the shortages. 

There are growing concerns about the cost of living in the UK.According to Downing Street, Lewis will offer his expertise on necessary long-term changes to UK supply chains and any immediate measures of improvement that can be taken. 

In a statement, Downing Street said, “this includes both identifying the causes of current blockages and pre-empting potential future ones, and advising on resolutions either through direct government action or through industry with government support.” Lewis will also co-chair a new supply chain advisory group and will be based in the Cabinet Office”. 

However, the Confederation of British Industry says action was required in the budget to unblock short-term challenges across the economy.

The lobby group warned that, “manufacturers are using key levers, such as hiring new workers and planning further investment in plant and machinery and training, to expand production. But with both orders and costs growth expected to climb over the next quarter; we’re not out of the woods yet.”

Companies have reported that average growth in the three months to October remained mostly the same as July, a period when company prices rose to their fastest rate since 1980.

This as UK consumer confidence has dropped for the third month in a row. According to consumer research firm GfK; consumer confidence index fell in October as the economy was hit with labor and fuel shortages, as well as a rise in COVID cases.

GfK says, “after six-months of robust recovery in the first half of 2021, UK consumer confidence has taken a turn for the worse with all vital signs weakening. The sharpest concern is how consumers see the future economy, with this collapsing 10 points this month just as it did in September.”

Meanwhile, a rise in inflation comes just one month after rocketing gas prices led to the collapse of several British energy suppliers, leaving households with the prospect of much higher bills in 2022.

There are growing concerns about the cost of living in the UK. The Bank of England believed the soaring energy costs will drive inflation above 4% this winter.

In recent weeks, more than a dozen energy suppliers have withdrawn from the retail market, and more are likely to do the same as wholesale gas prices rally. The UK has a so-called Energy Price Cap in place which puts the burden on energy firms. 

One of the largest energy companies in the UK, ScottishPower, says unless the government intervenes “we are in danger of just sleepwalking into an absolute massacre [ScottishPower] think probably in the next month at least another 20 suppliers will end up going bankrupt.” 

According to ScottishPower, the price cap currently costs providers around $6.9 billion (£5 billion).

Adding to the financial woes, figures from Confederation of British Industry shows the growth rate for orders in October was at its lowest level since April. This is while optimism had considerably fallen as many economists believe consumer demand may weaken in the face of rising living costs the end of the furlough scheme as well as rising Covid cases in the UK again. Experts have warned of another winter wave which could trigger another lockdown, something the Prime Minister has public dismissed as it could rock the economic recovery even more. 

The Bank of England had warned that action will be taken if it saw a surge in inflation expectations in the medium term. Last month, Britain’s Central Bank defined medium-term inflation expectations as five to 10 years from now.

The Bank of England’s new chief economist, Huw Pill, has warned, “the UK inflation level is likely to rise close to or even slightly above 5 percent,” early next year, as he says the central bank would have to take a ‘live’ decision on whether to raise interest rates during its November meeting.

In a gloomy outlook he said, “I would not be shocked, let’s put it that way, if we see an inflation print close to or above 5 per cent [in the months ahead]. And that’s a very uncomfortable place for a central bank with an inflation target of 2 per cent to be.”

The British Chancellor Rishi Sunak has said he has no “magic wand” to stop increasing inflation as he admits that the issue could be out of the government’s control. Sunak will unveil his autumn Budget on Wednesday. 

But the former Brexit Secretary, David Davis, when the Chancellor delivers his Budget this week, he will do so with the country facing its worst winter crisis for more than 40 years. 

Davis warned that, the “high taxing chancellor will send the UK economy crashing into the rocks.” He added, “rising fuel prices, tens of billions of pounds of tax increases, inflationary pressures and an environmental activist agenda for net zero are fueling a cost of living crisis for ordinary families.” 

A record proportion of the British public thinks inflation will accelerate over the next 12 months, according to data that could further boost expectations that the Bank of England will raise interest rates next month.

In 2011, a similar surge in public inflation expectations in the euro zone led the European Central Bank to raise interest rates twice that year, although it quickly reversed course.

Economists say those hikes in the interest rate by the European Central Bank had been a big mistake and some think the Bank of England is at risk of repeating the same errors amid increasing signs of a slow and long path towards economic recovery.

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