Fears for UK economy after manufacturing sector shrinks by 4%

Fears are growing over the state of the UK economy as it emerged that the manufacturing sector shrank by about 4% this year and is forecast to decline by a further 3.2% in 2023.

Increasing raw material costs, sagging consumer demand, staff shortages and higher borrowing costs have collectively formed the perfect storm for the UK manufacturing sector, according to the latest Make UK/BDO outlook report. The study showed that investment in the sector has gone “negative” for the first time in nearly two years.

The report suggests that the manufacturing sector is likely to be 7% smaller by the end of next year, although the report’s authors stressed that the 4% fall for this year is relative to a strong 2021, which experienced a pandemic bounceback.

The dire figures came as policymakers at the Bank of England weigh up whether to raise interest rates again on Thursday.

Make UK said it has been consistently revising down its forecasts for manufacturing growth in 2022 from 3% in March to 1.7% in July, then 0.6% in September and now, a contraction of -4.4%, highlighting the extent to which conditions have weakened.

As well as downgrading its forecasts for manufacturing, Make UK is forecasting GDP growth of 4.4% this year but a 0.9% contraction next year. More than 330 companies were surveyed as part of the report.

In November, the British Chamber of Commerce said manufacturing fell by 2.3% to record the worst performance over three months since the 1980s.

Stephen Phipson, chief executive at Make UK, said: “There is simply no sugar-coating the outlook for next year and possibly beyond … 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.”

Phipson called on ministers to help alleviate labour shortages with a temporary easing of the migration system, and for an expansion of the tax exemption for work-related training. He also wants a rethink of recent decisions on the research and development tax relief for small businesses “to ensure manufacturers are not deterred from investing in critical innovations”.

Richard Austin, BDO’s national head of manufacturing, warned there is little clarity on how the new government plans to build the right longer-term environment in which the sector can effectively plan.

News that the manufacturing sector is struggling will be noted at the Bank of England. On Thursday, the nine members of the monetary policy committee (MPC) will make an interest rate decision that could not only push up the cost of borrowing for businesses, but also the amount that millions of mortgage holders have to pay their banks every month.

Most analysts are expecting the base rate to rise from 3% to 3.5%, its highest rate for 14 years.

The expected 0.5% rise will represent a slight cooling in rate increases, after the Bank’s MPC opted for a 0.75% rise last month – the highest single increase since 1989.

Deutsche Bank has suggested that interest rates could push as high as 4.5% next year, drifting from the Bank’s own previous prediction of 5.25% last month. The rate rise threatens to pile further pressure on households already struggling with higher energy bills.

Later on Monday, the Office for National Statistics (ONS) will publish its gross domestic product (GDP) figure for October. GDP fell by 0.2% in the third quarter of the year as households and businesses struggled with soaring inflation.