Supply chain backlog slows economic growth
Economic rebound in danger as effect of shortages on growth is 14 times the normal level
The economic recovery is being held back by record levels of disruption in supply chains, as backlogs and bottlenecks hit manufacturers and staff shortages slow growth. The Confederation of British Industry’s latest industrial trends survey found that factories are suffering the worst stock shortages on record, with supply chains upended by escalating shipping costs, the effects of the pandemic and red tape stemming from Brexit.
BRITAIN’S economic recovery is being held back by record levels of disruption in supply chains, as backlogs and bottlenecks hit manufacturers and staff shortages slow growth.
The Confederation of British Industry’s latest industrial trends survey found that factories are suffering the worst stock shortages on record, with supply chains upended by escalating shipping costs, the effects of the pandemic and red tape stemming from Brexit.
Separately, a closely watched business index published by IHS Markit and the Chartered Institute of Procurement and Supply showed the UK’S economic rebound continued to lose momentum this month.
The flash composite purchasing managers’ index for August fell sharply to 55.3, from 59.2 in July, a six-month low. Anything over 50 indicates growth.
IHS Markit said the number of companies reporting that shortages of staff and materials were hurting growth was a record 14 times the normal level.
Electronics manufacturers were among the worst affected by product availability in August, the CBI said, as the industry suffered from semiconductor shortages that have been devastating the automotive sector.
Volkswagen and Toyota became the latest carmakers to warn over production cuts last week due to the global chip shortage. VW said it could be forced to reduce output during the autumn, while Toyota said production would be 40pc lower in September.
Economists warned there were clear signs of the recovery losing momentum following accelerated levels of growth earlier this summer.
Alpesh Paleja, lead economist at the CBI, warned that ongoing disruptions “could choke off future manufacturing growth”.
He said: “It’s therefore vital that businesses and the Government continue to work together to smooth over some of the frictions in supply chains and the wider sector, until activity settles back down to normal levels.”
Chris Williamson, chief business economist at IHS Markit, added: “Rising virus case numbers are deterring many forms of spending, notably by consumers, and have hit growth via worsening staff and supply shortages.”
IHS Markit said employment rose at the fastest pace since records began in 1998 as companies scrambled to rebuild capacity and replace staff who left the country at the start of the pandemic.
The bulk of the slowdown came from the dominant services sector, where the gauge dropped to 55.5 from 59.6.
Businesses have been given an extra year to adopt the new post-brexit UKCA product safety marking, which is replacing the EU’S CE label.
Initially manufacturers had until the end of this year to use the new certification regime, but now it will only be enforced from the start of 2023, the Business Department has announced.
Manufacturers’ group Make UK welcomed the extension to the deadline as “a huge relief”. A spokesman said: “Companies were becoming increasingly
nervous as the clock ticked down to the end of the year, caught up in the delays and bureaucracy in getting their products tested.
“The extra year will provide both exporters and importers with valuable breathing space to enable a new testing system to bed in place.”
William Bain, head of trade policy at the British Chambers of Commerce, said it is a “reprieve” but that there are still problems with the new set-up.
“Complex supply chains such as those in the automotive industry still face having to duplicate markings on certain components and incurring large costs for testing as a result,” he said.
“The Government needs to work now with businesses to ensure full consideration to the impacts are given before any decision to completely pull the plug on Ce-marked goods, risking incurring costs to our economy that we may come to regret.”
‘It makes more sense to take the work to the people than to move the people to the work’
Nando’s may run out of chicken. There could be no turkeys this Christmas. The meat processors are demanding that prisoners be sent out – stripes and chains optional, presumably – to man their production lines, while the road hauliers are insisting more drivers are found from somewhere if goods are to keep moving around the country.
And over the last few days, manufacturers and trade associations have become more and more hysterical in their demands for more immigrants to be allowed into the UK to fill all the vacancies.
But hold on. This is not the moment for the Government to give in. Sure, our departure from the European Union means the endless supply of cheap labour has been turned off. And, sure, some businesses and industries that had come to rely on that are going to suffer as the economy adjusts. But global prices make it clear there are no real shortages.
True, there will be some disruption, but it will be far better for the economy in the medium term to move into higher-value industries.
Whatever else they do, ministers shouldn’t change tack.
The demands for an easing of visa rules to save industry after industry are growing louder by the day. The Association of Independent Meat Suppliers said yesterday it wanted ministers to look at ways of extending the scheme that allows its members to tap into prison labour.
Nando’s said last week that it might have to close up to a tenth of its restaurants because of a shortage of chicken. The British Poultry Council has warned the labour crisis in the industry is so acute that we may run out of turkeys at Christmas.
Meanwhile, road hauliers have written to the Business Secretary Kwasi Kwarteng to demand that more people are made available. In each case, the demand is the same. We need to increase the supply of visas for European workers to cope with critical shortages of staff. Without that, many industries will simply grind to a halt.
But is that really necessary? No one would deny that there is some disruption and Covid-19, and the pingdemic, have hardly helped. But shortages? That seems a little extreme. Let’s take chicken for example. Our domestic poultry industry has become critically dependent on imported workers, mainly from Eastern and Central Europe. In many cases, more than half of the labour force come from somewhere else in Europe, and sometimes even more. The industry’s argument is that without them, there will be a dramatic fall in output, and very quickly shortages in the shops.
Really? In fact, poultry is a global industry. True, the world price for chicken is up slightly this year, mainly because of the rising price of grain, the main raw material, but the price is still down compared with 2018 (for anyone who doesn’t follow the poultry price on a minute-by-minute basis, it is $2.36per kilogramme right now compared to a peak above $2.60 four years ago). If there was actually a shortage of chicken the price would be far higher.
There may well be a fall in British production, but since the UK is only the 13th largest producer in the world, what happens here is hardly that significant. If there is a shortage, then we can just import some of the 14m tons produced in Brazil, or the 2.5m tons in Poland, or the 2.2m from Turkey. And, hey presto, Nando’s will be able to start dishing up grilled meat with peri-peri sauce again.
The same is true of most other meats, and indeed many other industries. The UK may end up producing less, and importing more from other countries where wages are typically lower. There is nothing wrong with that. It makes more sense to take the work to the people than to move the people to the work.
The important point is this: leaving the EU was always going to trigger some significant structural changes in the British economy, just as joining did half a century ago. It turns out that levels of immigration were far higher than anyone realised at the time.
As applications under the EU settlement scheme have flooded in, there were at least 6m workers from elsewhere in Europe in the UK and, given that quite a few may well have gone home during the pandemic or else not bothered to apply for permanent residence, it may well have been many more. That is roughly 20pc of the entire labour force, and while some of them are very highly skilled, most were on low wages. Whole industries grew up that were completely reliant on that for their business to operate profitably.
We can all understand that they are now upset that a key resource has been withdrawn. Hundreds of businesses may well disappear, and their owners will inevitably lose money in the process. That is hard on the people involved, and they will fight back furiously. Warnings of shortages at Nando’s and no turkeys at Christmas, and demands for prisoners to help out on production lines, or for the Army to step in and drive trucks, are an effective way of doing that.
And yet, in truth, it is far better in the medium term to adjust to a changed labour supply. Mass immigration skewed the British economy towards low-value industries (we produce a lot more chicken than Germany for example, although it is a larger country, and also more than France and Italy). We should let some industries shrink, and re-focus on others with far higher value-added per person, and far better growth prospects, and, whatever its merits, that isn’t meat processing.
The Government must hold firm against demands to ease visa restrictions. This is not the time to turn chicken over chicken – or anything else for that matter.