UK manufacturing sector shrinks by nearly 10 per cent

The number of manufacturing businesses in the United Kingdom fell from 270,000 at the start of 2021 to 244,140 a year on, contributing to concerns regarding the country's future financial stability.  

The decrease in the number of companies in the sector can be attributed to the decreasing number of orders, with output falling for the third month in a row in September 2022, and orders declining for a fourth consecutive month, according to an analysis from S&P Global. 

In 2022, turnover in the sector fell by 9.2 per cent, decreasing from £636bn to £577bn, while the number of people employed in manufacturing dropped by 1.7 per cent compared to the previous year, official figures show. 

In comparison, business numbers in the UK overall fell by 1.5 per cent over the same period, as rates of inflation for input costs and output charges have substantially accelerated in all sectors.

“The manufacturing sector had a challenging 2021, with business numbers shrinking by nearly 10 per cent — far exceeding the UK’s overall business loss," said Mark Tighe, CEO of innovation funding specialist Catax, commenting on the data. 

“The fact that output and orders continue to fall is a concern when advanced manufacturing is still seen as part of the UK’s future growth story," he adds. "A significantly weaker pound could well have an impact on turning that around this year.”

The majority of manufacturers linked lower production to a reduction in new work intakes, according to S&P Global.

Compared to previous years, in 2022 companies faced tougher conditions in both domestic and export markets. Many organisations also reported many instances of expected orders being postponed or cancelled, due to factors such as rising uncertainty, high transportation costs, longer lead times, inflationary pressure and the cost-of-living crisis.

Commenting on the latest survey results, Rob Dobson, director at S&P Global Market Intelligence, said: “The downturn in UK manufacturing continued at the end of the third quarter, meaning the goods-producing sector looks set to have acted as a drag on GDP.

Manufacturers have once again cut back production as new order intakes declined for the fourth successive month. Factories are reporting tough market conditions both at home and abroad. Disappointingly, exports continue to fall despite the more competitive exchange rate.

“With existing headwinds from the cost-of-living crisis likely to be exacerbated by the current volatility in financial markets, growing economic uncertainty and further increases in borrowing rates, the industrial sector is likely to remain in the doldrums during the coming quarter to add to deepening recession risks."

In addition to the falling orders, the manufacturing sector could have also been affected by the severe labour shortages the UK is currently facing, as shown by the Confederation of British Industry’s (CBI) employment trends survey carried out by recruitment agency Pertemps Network Group, in August 2022.

In the survey, three-quarters of businesses said they have experienced difficulties filling vacancies and a shortage of workers, with nearly half admitting they have been unable to meet output demands as a result. Over a third of businesses affected by a slimmer workforce also said they have had to reduce or make changes to the products or services they offer.

To help ease labour shortages, 46 per cent of businesses surveyed called for the government to introduce incentives to help them invest in technology to boost productivity, and 44 per cent requested the granting of temporary visas for roles that are in obvious shortage.

“It is crystal clear that labour market shortages are having a material impact on firms’ ability to operate at full capacity, let alone grow," said Matthew Percival, CBI director for skills and inclusion. “To go for growth and build a higher-wage economy we will need to ease shortages to create the conditions for higher investment.

“That means helping more British workers to overcome barriers into the workplace, like a lack of affordable childcare, and taking a pragmatic approach to immigration.”

The findings come as business output fell to its lowest level since February 2021 in September, according to a separate report this week from accountancy and business advisory firm, BDO. This data shows that companies are struggling to meet demand for production as they battle against staff shortages as well as soaring inflation, BDO said.

Not only has this driven up the cost of materials, but it has put increased pressure on many employers to raise salaries for staff who are facing higher living costs.

Jennifer Beckwith, CBI deputy director for employment policy, said: “One of the ways high inflation hurts households is through making it harder for employers to offer the kind of pay rises that will match the rising costs people are facing without putting up prices.

“It also means most businesses, and the highest proportion since we started asking the question in 2018, are now worried about labour costs threatening UK labour market competitiveness.

“In the months ahead, Government and business will need to work together to set the UK on a path to higher productivity – the only sustainable way to achieve long-term wage growth.”

September saw new export business contract at the quickest pace since May 2020, with reports of lower demand from the US, the EU and China, according to S&P Global.

However, manufacturers maintained a positive outlook overall during September, with over 49 per cent forecasting that their output would be higher one year from now, as planned investments, new product launches and hopes for a calmer economic backdrop are expected to lead to an influx of new contracts.

On Monday, 26 September 2022, the pound hit its lowest level against the dollar since decimalisation in 1971, falling by more than 4 per cent to just 1.03 dollars in early Asia trading before it regained some ground to about 1.07 dollars earlier in the day. 

The fall of the pound was a direct result of the unveiling of the UK government’s economic plans, which featured the biggest tax cuts in over 50 years. Although the government later backtracked on some of these proposals, there is still a lack of confidence in the country's financial stability, which is set to worse the impact of the cost-of-living crisis.