Manufacturing bounces back as clouds lighten

Britain’s manufacturers are seeing a rebound in activity in the first quarter of the year as the domestic and global markets have improved, easing fears of a significant recession for industry this year, according to a survey published by Make UK and accountancy and business advisory firm BDO.

The findings in the Make UK/BDO Q1 Manufacturing Outlook survey show a marked pick up on the picture in the final quarter of 2022. The figures echo the gradual improvements in other data, such as the UK and European PMIs, which are now only just in negative territory, as well as a strong pick up in demand from China.

Most notably, the improvement is being largely driven by strong demand in the electronics and mechanical equipment sectors, with the balance of orders in the electronics sector in particular (+64%) extremely strong.

According to Make UK and BDO, this could be due to several factors, including companies investing in digitalisation and extra capacity to counter labour shortages or, to take advantage of the final period of the super deduction scheme, which ends this month. Demand for electronics goods is especially strong from overseas (+67%), in particular the EU.

The survey also shows a significant improvement in the investment balance overall, even before the positive announcement on full expensing in the recent Budget Statement. However, given the average investment cycle in manufacturing is around seven years, Make UK believes that for the measure to make a real and lasting difference to business investment levels, the measure needs to become permanent.

However, despite the improvement this quarter, Make UK and BDO caution against the worst of conditions being over and are forecasting a contraction for manufacturing in 2023 as the substantial challenges the sector is facing show few signs of abating.

Fhaheen Khan, Senior Economist at Make UK, said: “Manufacturers have seen a rebound at the start of the year as conditions have improved in their major markets and business confidence has improved. However, one swallow doesn’t make a summer, and it is far too early to say the worst has passed given the significant challenges the economy faces. However, the recent Budget should help boost investment in the short to medium term although ideally, full expensing should be made permanent to better reflect the investment cycle for manufacturers.”

According to the survey, the balance on output improved to +21% from +5% and is expected to gather strength in the second quarter to +32%, a significant improvement. Total orders also rose substantially from +6% to +28%, although the next quarter is slightly less positive at +23%.

In line with this improved picture, UK orders increased to +20% from +2%, while export orders also saw a rise from -6% to +12%, reflecting better conditions in overseas markets.

The scramble to attract and retain talent also shows no signs of abating, with recruitment intentions increasing from +3% to +19%, improving substantially to +31% in the next quarter. Investment intentions also rose substantially from -5% to +14% potentially reflecting manufacturers’ intention to take advantage of the final quarter of the super-deduction scheme before it ends this month.

The Make UK/BDO survey showed that inflationary pressures are still very evident for manufacturers, with increased costs still being passed on. UK and export prices were both at balances of +52% picking up slightly from last quarter.

In terms of overall output, this year Make UK and BDO are forecasting a contraction of -3.3% (a slight improvement from the -4.4% forecast at the end of last year) and growth of just 0.8% in 2024.

The survey of 338 companies was conducted between 15 February and 8 March.