Brexit Fuels Uncertainty in Manufacturing, Supply Chain Economy

UK vote to leave the European Union exacerbates economic uncertainty and may continue to stall capital investment spending here at home.

Supply chain companies waiting for capital investment spending to return to healthy levels should be prepared to test their patience a bit longer. The recent British vote to leave the European Union has created a new wave of economic uncertainty that is doing little to help the slow-growth economy that has become the norm in the electronics supply channel over the last few years. And though it’s still too early to tell how much of an effect the vote will have globally—the issue isn’t over yet, and it could take two years to negotiate the United Kingdom’s break from the EU—economists and industry watchers say it is likely to prolong the weakness in the manufacturing sector here at home.

“Manufacturing as a whole has had a rough year,” says Cliff Waldman of the Manufacturer’s Alliance for Productivity and Innovation, which monitors both U.S. and global economic conditions. “It’s been a flat to down year for U.S. manufacturing. What I fear with Brexit is that the stability will go out the window, taking a bad year and [ensuring] that it will keep on being bad.”

MAPI’s most recent U.S. industrial outlook calls for 0.4% growth in 2016, followed by 2.5% growth in 2017 and 2.8% in 2018. The group cites shocks to the manufacturing economy—including low energy prices that stall investment spending, the strong dollar, and high inventories throughout the supply channel—as key reasons for continued volatility for the remainder of this year. Though these shocks have eased a bit, the Brexit vote has added another layer of caution—not enough to threaten a significant downturn in U.S. manufacturing, but enough to keep the current slump alive.

“If anyone was hoping manufacturing would firm up, Brexit probably killed that,” adds Waldman, who is director of economic studies for the MAPI Foundation, the organization’s research arm.

Too Soon to Tell

Taking a closer look at the electronics supply chain in particular, market research firm IC Insights recently lowered its semiconductor market forecast for 2016, but only partially due to Brexit. Rob Lineback, senior market research analyst at IC Insights, points to the weak overall economy and a plunge in DRAM sales as larger issues facing the global integrated circuit and semiconductor markets. IC Insights says it expects the DRAM market to drop 19% this year, pulling down the entire semiconductor market, which it says will closely mirror GDP growth of just 2.3% in 2016.

“The Brexit vote is currently expected to have a minor impact on the worldwide IC and semiconductor markets,” Lineback says. “Due to other market factors (like pricing erosion and pockets of weakness in some products), we’re also reducing our sales projection for optoelectronic, sensors/actuators, and discrete semiconductors to about 2% growth versus a previous forecast of 5% growth in 2016.”

Like Waldman, Lineback says the biggest factor surrounding Brexit is uncertainty.

“It’s a little early to blame Brexit for lowering the IC and total semiconductor market,” he adds. “The UK won’t leave the EU for a couple years, but the clouds of uncertainty hanging over the country and whether other EU members will try to leave the EU will dampen the prospects of growth in Europe during the next few years.”

Waldman emphasizes that upward pressure on the dollar, further weakening of U.S. manufacturing, and the potential for a recession or pronounced economic weakness in the UK and the EU remain top concerns. The recession risk stems mainly from concerns about a hit to business investment—again, fueled by the cloud of uncertainty hanging over the global economy.

“Uncertainty in spades is really going to freeze investments, particularly business investments,” Waldman says. “And that is not a favorable situation for electronics manufacturing.”

Globally, he adds that any risk to the UK and EU economies have far-reaching effects due to their size and influence, creating the potential for a shaky global picture to become “even more shaky.”

This all comes despite better economic performance recently in Europe, as the region returned to growth following two recessions. The UK referendum complicates matters, placing yet another question mark on the global economic horizon.