Manufacturing output is set to contract next year as the deteriorating economic conditions at home and abroad impact on the sector, with increasing costs across the board, tighter fiscal and monetary policy and weakening consumer demand forming a perfect storm.
The forecast was made in the Make UK/BDO Q4 Manufacturing Outlook survey which shows manufacturing contracting by -3.2% in 2023. This comes on the back of a forecast -4.4% contraction this year, although Make UK stressed the number for this year is relative to a very strong 2021 which reflected the pandemic bounce back.
However, given Make UK has consistently been revising down its forecasts for manufacturing growth in 2022 throughout this year from 3% in March to 1.7% in July, 0.6% in September and now, a contraction of -4.4% (1), it highlights the extent to which conditions for the sector have weakened significantly, especially in the final quarter of the year.
As well as downgrading its forecasts for manufacturing Make UK is forecasting GDP growth of +4.4% this year but, a contraction next year of -0.9%.
In response, Make UK warned of the danger of policymakers sleepwalking into an acceptance of little or no growth as a normal economic scenario. It re-iterated its call for Government to develop a wide-ranging industrial strategy with a long-term vision at national and regional level.
Furthermore, while the Chancellor took some welcome measures in the Autumn Statement to help ease the short-term pressures on business, Make UK said more measures will be needed if economic prospects continue to weaken. These should include:
- Alleviating labour shortages with temporary easements to the migration system and ensure 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
- Re-thinking recent decisions on the R&D tax relief for small businesses to ensure manufacturers are not deterred from investing in critical innovations
Stephen Phipson, Chief Executive at Make UK, said: “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.
“As a result, while the Chancellor has already brought in some welcome measures to help ease the cost pressure on companies in the short term, it may not be too long before we see him having to bring more firepower to ease cost pressures.
“However, the bigger issue is that the UK risks sleepwalking into an acceptance that little, or no growth is the norm. Government needs to work with industry as a matter of urgency to deliver a long-term industrial strategy that has growth at national and regional levels at its heart.”
Richard Austin, BDO’s National Head of Manufacturing, added: “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 survive.
“The true impact of inflationary pressures and dwindling investment may not be immediately apparent in the sector, but they will be reflected in longer-term growth. For instance, with hiring being a challenge and energy prices rising, manufacturers may not have the funds to invest in automation and green initiatives, thus impacting the future competitiveness of the UK manufacturing sector.”
According to the survey, the balance on output remained stable at +5% although in line with the weakening economic conditions is expected to turn negative in the next quarter (-6%). Total orders fell significantly from +15% to +6% but are also expected to turn negative next quarter (-2%).
In line with this poorer picture, the domestic market turned very much weaker, falling to -+2% from +12%, while export orders fell from +3% to -6%. The outlook is for further deterioration in the next quarter with balances of -6% and -11% respectively.
However, despite this weakening picture, the scramble to attract and retain talent meant that recruitment intentions held up at +3% and are expected to grow next quarter. However, investment intentions turned negative for the first time in seven quarters falling to a balance of -5% from +7%.
The Make UK/BDO 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% from +53% with export prices staying flat at +51%.
Looking forward, both UK and export prices are expected to continue falling to +48% and +47% respectively. While these figures remain very high by historical standards, they are a significant reduction on the figures seen over the last year.
The survey of 335 companies was conducted between 2 and 24 November.