New Economic Report Says Sector To Contract by 0.8% In 2020

The manufacturing industry will face more disruption as a result of Brexit than any other sector, according to the latest UK Powerhouse study by law firm Irwin Mitchell and the Centre for Economic & Business Research (Cebr).

The report’s unique ‘Brexit Disruption Index’ analyses which industrial sectors will be affected most after the UK leaves the EU.

It bases its predictions by analysing the change to three key indicators - the free movement of labour, tariffs on exports to the EU and investment into the UK from the EU – and assumes that a deal will eventually be agreed.

Manufacturing has an index score of 90% and the report says that even if a deal is secured the sector will contract by 0.8% in 2020, down from a fall of 0.5% this year.

Top three most affected industries according to the Brexit Disruption Index (UK Powerhouse)

The other two sectors in the top three expected to experience the most disruption are wholesale, retail, repair of vehicles, which scores 79%, and admin and support services, which has an index rating of 36%. 

Mining and quarrying, education, and electricity, gas, air conditioning supply are expected to see the least disruption.

The report says the manufacturing industry scores the highest in the exports to the EU indicator. In 2017, the manufacturing industry exported goods worth over £87 billion to the EU, a significant £26 million more than the next highest exporting industry in the index. It similarly received a noteworthy amount of FDI from the EU, amounting to over €11.6 billion in 2017.

The potential for increased tariffs and complications will drive up the cost of doing business with partners in the EU following Brexit. For manufacturing firms outside of the EU who rely on the UK as a gateway into the continent, the report says a Brexit outcome that restricts freedom of trade will further limit the UK’s attractiveness as a place to do business. This could in turn hurt growth within the manufacturing sector. 

“As the UK approaches the next Brexit deadline, all options are still on the table. With or without a deal, Brexit it set to be disruptive to the economy, at least in the short term, with varying levels of disorder expected across the different sectors in the UK. 

“The Brexit Disruption Index presented in this report shows which parts of the UK economy are most exposed, analysing each sectors’ reliance on EU labour, trade and foreign direct investment. 

“The manufacturing industry is expected to be the most highly disrupted, with the prospect of higher tariffs and non-tariff trade barriers set to drive up the cost of doing business following Brexit. Better performing sectors on the index, such as real estate activities, education or mining, are currently less exposed to trade and investment from the rest of the EU, which will offer some protection against the wider disturbance after the UK’s departure.”

Methodology

All Powerhouse forecasts in this report utilise Cebr’s central Brexit scenario. Cebr’s central forecasts are based on the assumption that the UK will reach an agreement with the EU and that a transitional arrangement will be put in place. On the immigration policy, we rely on the lower immigration population estimates assuming that a visa system will be implemented for EU nationals, but that the requirements (e.g. the minimum salary, the NHS surcharge payment, the application fees, etc.) would be more relaxed than they currently are for non-EU nationals requiring a visa.

The report’s Disruption Index is based on three key ways in which industries in the UK will be affected by Brexit. Each of these has been measured for the 18 key sectors of the UK economy. 

1. The share of workers in each sector who are non-UK EU nationals – this is important to consider because it is likely that free movement of labour between the UK and the EU will be restricted after Brexit. 

2. Value of goods exports to the EU by sector – UK businesses could be subject to tariffs on exports to the EU after Brexit.

3. Foreign direct investment from the EU by sector – Many businesses currently receive investment from the EU which may be lost once the UK is no longer in the EU.

Each of the indicators was scored according to the likelihood that Brexit will disrupt businesses in each sector, where 100% is the sector that will see the most disruption, compared to the other sectors, and 0% indicates the least disruption