Fears over the state of the UK economy are mounting as manufacturing was revealed to have contracted about 4% this year and is expected to contract a further 3.2% in 2023.
Rising raw material costs, falling consumer demand, labor shortages and higher borrowing costs have combined to create the perfect storm for the UK manufacturing sector, according to the latest Make UK/BDO Outlook. The study showed that investments in this sector have turned “negative” for the first time in almost two years.
The report suggests that manufacturing is likely to be 7% smaller by the end of next year, although the report’s authors stressed that the 4% contraction this year compares to a strong 2021 that was marked by a pandemic experienced an upswing.
The bleak numbers came as Bank of England policymakers weighed on Thursday whether to raise interest rates again.
Make UK said it is consistently revising its forecasts for 2022 output growth downwards from 3% in March to 1.7% in July, then 0.6% in September and now to a -4.4% decline , underscoring the extent of the deterioration in conditions.
As well as downgrading its manufacturing forecasts, Make UK forecasts 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 UK Chamber of Commerce said manufacturing fell 2.3%, its worst three-month performance since the 1980s.
Make UK Chief Executive Stephen Phipson said: “There is simply no icing on the prospects for next year and possibly beyond… Britain risks accepting that little or no growth is the norm. The government urgently needs to work with industry to develop a long-term industrial strategy that focuses on growth at national and regional levels.”
Phipson urged ministers to alleviate labor shortages by temporarily relaxing the migration regime and expanding tax exemptions for work-related training. He also wants recent R&D tax break decisions for small businesses to be reconsidered “to ensure manufacturers are not discouraged from investing in critical innovation.”
Richard Austin, BDO’s national production manager, warned that there was little clarity on how the new government would create the right longer-term environment in which the sector could plan effectively.
News that the manufacturing sector is struggling is 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 raise the cost of borrowing for companies, but also the amount millions of mortgage holders have to pay their banks each month.
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Most analysts expect interest rates to rise to 3.5% from 3%, the highest rate in 14 years.
The expected 0.5% hike will mark a modest slowdown in rate hikes after the bank’s MPC opted for a 0.75% hike last month – the highest single hike since 1989.
Deutsche Bank has indicated interest rates could rise as high as 4.5% next year, down from the bank’s own earlier forecast of 5.25% last month. The rate hike threatens to put further pressure on households already grappling with higher energy bills.
Later Monday, the Office for National Statistics (ONS) will release its gross domestic product (GDP) figures for October. GDP fell 0.2% in the third quarter of the year as households and businesses struggled with rising inflation.
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