Manufacturing to contract despite recent bounce back

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 the Make UK/BDO Q1 Manufacturing Outlook survey.

The survey of 338 companies, published this week by Make UK and accountancy and business advisory firm BDO, shows a marked pick up on the final quarter of 2022, echoing the gradual improvements in other recent surveys like the UK and European PMIs and reflecting a strong pick up in demand from China.

The improvement is said to be 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. Demand for electronics goods is especially strong from overseas (+67%), in particular the EU.

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.

The survey also shows a significant improvement in the investment balance overall even before the announcement on full expensing in last week’s Budget. However, given that 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 it needs to become permanent.

Despite the improvement this quarter, Make UK and BDO caution against assuming that the worst is 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.”

Richard Austin, BDO’s National Head of Manufacturing, said: “Recent government announcements do very little to address the immediate threats to UK manufacturers resulting from the heavy burden of energy costs.

“UK manufacturers need ongoing certainty on a range of fronts, including long-term energy costs, commitments and investment to develop UK gigafactories and support to attract a sustainable workforce. Manufacturers and investors need consistency and long-term support to build and shape their future plans around.

“The results of our research with Make UK illuminates that, despite glimmers of good news such as strong demand for electronics and mechanical equipment, inflationary pressures are still very evident for UK manufacturers with increased costs still being passed on.”

The survey shows that inflationary pressures are still very evident for manufacturers with increased costs still being passed on.

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