Brexit stockpiling risks causing a bullwhip effect on the UK economy
UK Q1 economic performance may get a temporary boost but the backlash due to Brexit stockpiling could be brutal in the coming months
The UK manufacturing PMI in March rose to its highest level in over a year, but it owed plenty to the fact that stockpiling rose to a record level among G7 countries as a result of Brexit uncertainty. In terms of headlines, it's an upbeat reading and overall this has even fed into Q1 economic growth as we saw in the monthly GDP figures yesterday.
This puts the UK on track to record a +0.4% q/q growth in Q1, if you account for unchanged estimates for the month of March. But while on the front of it, things may seem bright, it's worth considering that this is just one part of the temporary effect being triggered due to Brexit stockpiling from manufacturers and consumers.
The issue with stockpiling is that it creates kinks in the supply chain as shown above. That is where we see fluctuations in demand be amplified, creating a ripple effect that destabilises production and the supply chain.
This is due to the fact that the current upswing in demand will eventually level out as inventories build and will then be counterbalanced by a downswing period. However, if the scenario here starts to feed into consumers also buying/stockpiling in anticipation of Brexit worries, it will amplify the rippling effect as manufacturers stockpile even more to cope with demand from consumers.
That effect is shown in the graph above as being that demand fluctuations becoming bigger and bigger, leading to larger upswings and downswings. And that is known as the 'bullwhip effect'. You can also watch this video for more insight and a better explanation on what this phenomenon actually is.
So, how will this impact the UK economy?
The issue with fluctuating demand is that the downswing period more often than not is more pronounced and tends to foresee a larger period than the upswing period. You would think that it should be a like-for-like counterbalance but the fact is consumer behaviour also plays a part in this and people tend to react more profoundly to fear than to good news.
In the bigger picture, this is bad news for the UK economy as it means that whatever positive factors will be masked by the fact that the bullwhip effect is set in motion while downside factors will only get amplified during periods where the economy is struggling.
In summary, this will make it harder for the Bank of England to also get a good read on the UK economy and that means any decision on interest rate hikes in the future will also get more complicated; that is assuming that Brexit is already out of the way by then.