UK manufacturing stabilises, but demand & costs remain challenging

Manufacturing output was broadly flat in the three months to July (weighted balance of -2 per cent), following a sharp decline in the previous quarter (-23 per cent). Although 12 out of 17 sub-sectors recorded lower output, gains in motor vehicles, transport equipment, and food, drink and tobacco helped offset the overall fall. Firms expect output to decline slightly over the next quarter (-6 per cent).

Demand conditions continued to weaken. Total new orders dropped 17 per cent, driven by a 16 per cent fall in domestic demand, while export orders remained flat. A further drop in total orders is expected by October (-18 per cent). Exporters face growing headwinds, with 56 per cent of firms citing pricing as a key constraint—up from 38 per cent in April—likely due to higher US tariffs and a stronger Sterling. Additionally, 20 per cent of firms pointed to quotas and licensing barriers, a level not seen since the 1980s.

Business sentiment continued to deteriorate in July, with optimism down 27 per cent (from -33 per cent in April) and export sentiment falling 26 per cent (from -35 per cent). Firms expect competitiveness to decline further in both EU (-10 per cent) and non-EU (-13 per cent) markets, after recording declines of -13 per cent and -23 per cent respectively—the latter marking the sharpest fall since 2005.

Investment intentions remain weak. Firms plan to cut spending on buildings (-28 per cent), plant and machinery (-15 per cent), training and retraining (-13 per cent), and product and process innovation (-6 per cent). The main constraints cited were demand uncertainty (50 per cent), inadequate returns (27 per cent), and labour shortages (21 per cent).

Cost pressures intensified, with average costs rising 63 per cent—the fastest pace since January 2023. Growth is expected to moderate by October (41 per cent). Domestic prices rose 33 per cent, while export prices increased 19 per cent; both are forecast to rise more slowly in the next quarter (+21 per cent and +1 per cent, respectively).

Stocks of work in progress declined sharply (-12 per cent), raw material inventories were stable (-1 per cent), and finished goods rose slightly (+3 per cent). All categories are expected to fall by October, with work in progress at its weakest forecast since January 2021 (-21 per cent), raw materials (-19 per cent), and finished goods (-6 per cent).

Employment in manufacturing fell for the third consecutive quarter (-11 per cent), with a marginal decline expected by October (-5 per cent). Skilled labour shortages continue to constrain output, cited by over one-quarter of firms.

“Conditions in UK manufacturing remain challenging, with many firms reporting subdued and unpredictable demand. High input costs, labour shortages and global supply chain disruptions are continuing to put pressure on margins and capacity,” said Ben Jones, lead economist at CBI. “Rising labour costs have undermined manufacturers’ external competitiveness. While some exporters are finding opportunities overseas, overall sentiment is cautious, with economic and policy uncertainty weighing heavily on investment decisions.”

“What manufacturers really need now is stability—starting with predictability in the tax environment, alongside delivery at pace on the government’s industrial strategy, skills reforms and steps to bring down energy costs. As we look ahead to the Autumn Budget, government must work to reassure businesses to avoid additional uncertainty that could further weaken investment prospects.”

ALCHEMPro News Desk (SG)