UK's manufacturing sector to face recession in '23: Make UK/BDO survey

UK’s manufacturing sector is expected to contract by 3.2 per cent in 2023. This comes on the back of a forecast 4.4 per cent contraction this year, although Make UK stressed the number for this year is relative to a very strong 2021 which reflected the pandemic bounceback. Increasing costs across the board, tighter fiscal and monetary policy, and weakening consumer demand could form a perfect storm for the manufacturing sector, as per the survey.

However, given Make UK has consistently been revising down its forecasts for manufacturing growth in 2022 throughout this year from 3 per cent in March to 1.7 per cent in July, 0.6 per cent in September, and now, a contraction of minus 4.4 per cent, it highlights the extent to which conditions for the sector have weakened significantly, especially in the final quarter of the year.

Make UK also warned of the danger of policymakers sleepwalking into an acceptance of little or no growth as a normal economic scenario. It reiterated its call for the UK government to develop a wide-ranging industrial strategy with a long-term vision at national and regional level.

According to the survey, the balance on output remained stable at 5 per cent in this quarter, although in line with the weakening economic conditions is expected to turn negative in the next quarter (minus 6 per cent). Total orders fell significantly from 15 per cent to 6 per cent but are also expected to turn negative next quarter (minus 2 per cent).

In line with this poorer picture, the domestic market in this quarter turned very much weaker, falling to 2 per cent from 12 per cent, while export orders fell from 3 per cent to 6 per cent. The outlook is for further deterioration in the next quarter with balances of minus 6 per cent and 11 per cent respectively.

The survey showed the increased costs manufacturers are seeing are still being passed on, although the data suggests this is becoming slightly harder to do. UK prices fell very slightly to 49 per cent from 53 per cent with export prices staying flat at 51 per cent.

Looking forward, both UK and export prices are expected to continue falling to 48 per cent and 47 per cent respectively. While these figures remain very high by historical standards, they are a significant reduction on the figures seen over the last year.

Furthermore, while the chancellor took some welcome measures in the Autumn Statement to help ease the short-term pressures on business, more measures will be needed if economic prospects continue to weaken, Make UK said.

These measures should include: alleviating labour shortages with temporary easements to the migration system and ensuring manufacturers have the funds to train and retrain employees by expanding the tax exemption for work related training into a wider training investment allowance; tackling the increased cost to business by extending business rates reliefs for retail hospitality and leisure to manufacturing; spurring on much needed immediate investment by allowing first year allowances; and re-thinking recent decisions on the research and development tax relief for small businesses to ensure manufacturers are not deterred from investing in critical innovations.

“There is simply no sugar-coating the outlook for next year and possibly beyond. Even for a sector as resilient as manufacturing, these are remarkably challenging times which are testing even the best and most successful of companies to the limit,” said Stephen Phipson, chief executive at Make UK.

Richard Austin, BDO’s national head of manufacturing, said: “Manufacturing input prices are growing rapidly, so it is little wonder UK manufacturers are having to pass the costs onto their customers in order to remain viable.

“Without the right government support and reassurance, manufacturing businesses will be inclined to retain cash to keep the doors open, rather than invest cash in future growth and competitiveness of the sector. There is little clarity on how the new government plan to build the right longer term environment in which the sector can effectively plan.”

ALCHEMPro News Desk (DP)