MARKET. ANALYSIS. PROGNOSES. Brexit-Caused Uncertainty Continues to Hinder Logistics Industry’s Performance in the UK


Logistics and road transportation industries in the UK continued to underperform in 2017, witnessing a decline in revenue by 1.5 % in constant prices to USD 152.6 billion. No improvements are anticipated in 2018, with logistics and road transportation industries revenue forecast to decline by 0.5 %.

A number of negative factors, including weak economic growth, stagnating consumer income and rising inflation continued to hinder consumer confidence and spending during 2017. In particular, declining consumer confidence hindered performance of wholesale, retail and sales of cars and fuel industries where private buyers generate large share of the revenue. This in turn adversely affected the logistics industry, as retail industries are among key buyers of logistics services in the UK. Weak economic growth and rising inflation are forecast to persist in 2018, further hindering the demand for logistics services.
On the other hand, performance of the UK’s manufacturing industries started to stabilise in 2017 as indicated by slightly improving business confidence. UK manufacturers continued to benefit from the weaker pound exchange rate, making exports more competitive, and growing production localisation of parts and other components used in manufacturing. Rising exports and manufacturing production provided some relief for logistics providers during 2017. However, mid-term growth prospects remain cloudy. Due to high political uncertainty, the majority of UK manufacturers remain reluctant to expand production capacities, also meaning weaker demand for industrial goods transportation services in 2018–2019.

Despite progress in negotiations made in 2017, businesses continue to re-evaluate their supply chains

Despite a rough start in EU-UK negotiations over Brexit, some progress was achieved during 2017. First of all, the rights of EU and UK citizens were agreed to be protected, secondly, the UK committed to implement no hard border with Ireland. Such decisions provided some clarity for business and indicated willingness to maintain free trade between the UK and EU. However, uncertainties regarding free movement of people remain. Restrictions on free movement of specialists from the EU would be particularly harmful for the UK’s aerospace and high-tech industries, quite heavily relying on foreign skilled workers. If free movement of specialists would be restricted this might have an impact on manufacturing and parts supply chains.
Besides manufacturers, UK retailers and fast moving goods carriers are also preparing for possible changes in distribution channels. In case negotiations over free trade agreements fail, UK retailers are considering relocating their distribution centres to the EU. Germany, France and the Netherlands, having well-developed logistics infrastructure and geographic proximity to the UK, are most likely to attract new investments. However, the final business decision will be well-weighed and no concrete actions are expected to be taken during 2018.
Moreover, a large number of businesses in the UK and EU are re-evaluating their supply chains, primarily to shield from exchange rate fluctuations. Business surveys indicate that 63 % of companies in Europe are expecting a bigger share of their supply chains to be outside of the UK. Companies in the chemicals, transport equipment, machinery and high-tech goods industries are expected to move a larger share of their production outside the UK, to countries such as Germany, the Netherlands, Spain or France. In addition, this might have an impact on component and material supply chain since companies in the aforementioned countries source a large share of input materials from Central or Eastern Europe, offering lower costs. Such a situation means that the supply chain for various components, including plastic and rubber parts, glass, electronics and others, will change, with demand shifting from the UK to Central/Eastern Europe and Poland, Czech Republic and Slovakia in particular.
Furthermore, supply chains in the UK are also expected to experience some changes. Business surveys show that around 40 % of companies in the UK are planning to increase production localisation in order to shield against unfavourable exchange rate fluctuations and political risk (in case free trade with EU is restricted). Companies targeting local consumers were among the pioneers to localise production, for example Cadbury is reshoring production from Poland to Bourneville, while IKEA is planning to increase production of furniture in the UK to keep costs down. Automotive industry is expected to lead production localisation in the future, as car manufacturers source just 44 % of parts domestically and aim to increase parts localisation. For example, in 2017 supercar producer McLaren pledged to invest GBP 50 million in localising production of carbon fibre parts.
Increasing production localisation is expected to provide some relief for the UK’s manufacturers, suppliers and logistics services providers. However, having said that, the majority of the companies indicate they also aim to reduce spending on production input materials when renegotiating the supply chains. Such situation indicates that providers of logistics and road transportation services in the UK will continue to face pressure on profits from manufacturers, while rising inflation and fuel prices are likely to further erode profitability. As of 2016, profits of the UK’s logistics and road transport industries declined by 11 %. In comparison, transportation and logistics industries in other Western European countries witnessed profit growth.

2018 will be the decisive year, shaping post-Brexit relations between the UK and EU

2018 will be the decisive year for Brexit negotiations, indicating how future economic relations between the UK and EU will look. In turn, 2018 will indicate how UK-EU business relations and supply chains will evolve. Due to high political uncertainty UK businesses were reluctant to invest in machinery upgrades or production capacity expansion until final Brexit outcomes are clearer. During 2018, ongoing UK-EU negotiations are expected to shed some light for businesses and encourage either new investments or production relocation (in case free trade deal negotiations fail).
Currently Delayed FTA is the most likely outcome and Euromonitor International’s macro model gives 40–50 % probability for such scenario. In Delayed FTA the UK and EU would agree to extend the UK’s membership in the EU for two to three years, while a final post-Brexit free trade deal would be reached in 2020–2022. If such scenario occurs, no drastic changes in trade flows and supply chains are expected. However, the UK also wants to include services in the free trade deal and impose some restrictions on free movement of people, which might spark resistance from other EU members and eventually end up in a no-deal scenario. Euromonitor International’s macro model gives 35–45 % probability for such scenario and if it occurs, we are likely to see the start of production relocation from the UK and disruptions in the supply chains starting in 2019.


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The magazine JŪRA has been published since 1935.
International business magazine JŪRA MOPE SEA has been
published since 1999.

ISSN 1392-7825

2017 ©