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UK manufacturing sector facing major challenges

UK manufacturing sector facing major challenges

UK manufacturing sector facing major challenges

Manufacturing was once the bedrock of the economy and the source of the UK’s rise to economic superpower status in the 18th and  19th centuries. Since Margaret Thatcher unceremoniously re-shaped the economic landscape in the 1980s, the sector has shrunk from 25% of GDP in 1979 to 16% in 1990 and to just 9% now. In the process it has become highly specialised and is a major global player in certain fields, such as motor sport, defence and aerospace.

After the shallow recession in H2 2023, there have been various slightly more positive economic indicators in the past month, with a 0.6% uptick in GDP in Q1 2024 and inflation coming down from its 2022 peak of 11% to 3.2% in March 2024. Here, we investigate how the manufacturing sector faring and what its prospects are.

The S&P Global/CIPS Purchasing Managers’ Index (PMI)

The Manufacturing PMI is an index incorporating survey results on various aspects of activity provided by firms in the manufacturing sector throughout the country. It has been gathering data since 1992. Any reading above 50 suggests the sector is expanding, while a figure below 50 implies that the sector is in contraction. Policymakers, pundits and traders watch these surveys closely, not just based on their proven accuracy in predicting trends but because the data is real time, rather than historic.

The Manufacturing PMI for April 2024 showed the sector slipping back into contraction with a figure of 49.1, a significant retreat from March’s 20-month high of 50.3. To put this in context, the all-time high was 65.6 in May 2021, while the all-time low was 32.6 in April 2020. Both extremes were the direct result of the Coronavirus pandemic. The long-term average between 2008 and 2024 has been 51.8.

The news release accompanying the April PMI results included a comprehensive summary of the factors currently at play for manufacturers:

“The UK manufacturing sector suffered a renewed downturn in April, as output and new orders contracted following short-lived rebounds in March. The sector is still besieged by weak market confidence, client destocking and disruptions caused by the ongoing Red Sea crisis, all of which are contributing to reduced inflows of new work from domestic and overseas customers, with specific reports of difficulty securing new contract wins from Europe, the US and Asia.

“The downturn is also sustaining cost caution at manufacturers, leading to lower employment, stock holdings and cutbacks in purchasing activity. The news on the prices front is also worrisome for those looking for a sustainable path back to target (consumer price) inflation, with cost pressures growing in the industry and feeding through to higher selling prices at the factory gate.”

Business confidence among manufacturers

Despite the negative PMI reading, the outlook for the UK manufacturing sector remained positive in April. Over half (52%) of PMI respondents forecast that their company’s output would increase over the next twelve months, compared to only 8% predicting a decline. The overall optimism was attributed to hopes of a revival in demand, new product launches and a general improvement in market conditions.

Manufacturing GDP

The latest GDP figures from the Office for National Statistics (ONS) showed that manufacturing output increased by 1.4% in Q1 2024 following a fall of 1.0% in Q4 2023.

The largest positive contributor was a 5.7% increase in the manufacture of transport equipment, which has grown for six consecutive quarters. Production of basic metals and metal products grew 3.1%, while food products, beverages and tobacco rose by 1.5%. However, this was partially offset by a fall of 3.6% in the manufacture of textiles, clothing and leather, which fell for the sixth quarter in a row.

Business failures

The worst affected sectors for insolvencies have long been construction, hospitality and retail. Typically they account for 17%, 15% and 9% of total failures, respectively.  Manufacturing makes a more modest contribution, representing only 7% of business failures in England & Wales in the twelve months to February 2024. 1,700 manufacturing companies filed for insolvency in that period and 150 in the month of February 2024. This is one of the sectors where its percentage of failures (7%) is less than its proportion of GDP (9%), reflecting the relatively lower commercial and financial risks than for example, in construction or hospitality.

Prospects for 2024 and 2025

The confidence shown by those surveyed for the Manufacturing PMI as regards future output is re-assuring, as is the improved mood music about the economy as a whole. Nevertheless, the sector is not without major challenges ahead.

The latest employment statistics for Q1 2024 confirm the easing of labour market conditions, which has been reported anecdotally for some time. The unemployment rate has risen marginally from 4.2% to 4.3%, while job vacancies have fallen again, this time by 26,000 to 898,000. The number of unemployed people per vacancy rose to 1.6, compared to 1.4 in Q4 2023.

More concerning is the increasing inactivity in the workforce, with 22.1% of people between 16 and 64 not seeking work. What level of skill and experience is this phenomenon denying to manufacturers? Equally worrying is the strong pay growth, which is rising by 6% despite inflation dropping back to 3.2%. This is driving up labour costs for manufacturers and reducing profit margins.  We looked in detail at workforce issues for manufacturers in January this year.

Whatever issues there may be over staff recruitment and retention are dwarfed by the inexorable rise of Artificial Intelligence, which is overwhelming every sector of the economy. Change in manufacturing used to be measured over years and sometimes decades; now, it can be more like weeks.  Our detailed study of the challenges for manufacturers from earlier this year can be found here.

 


If you are seeking professional advice for your business, Opus is here to help. You can speak to one of our Partners who can discuss options with you. We have offices nationwide and by contacting us on 020 3326 6454, you will be able to get immediate assistance from our Partner-led team.

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