Domestic Orders Drop Sharply As Risks Cloud Manufacturing Outlook

Make UK survey shows collapsing domestic demand and rising costs weigh on confidence and recruitment, even as output and investment hold steady.

UK manufacturing has begun 2026 on a fragile footing. Output and investment are boosted following a weak end to 2025, but collapsing domestic orders and rapidly rising costs, likely to be worsened by higher oil prices and Middle East tensions, are weighing on growth, margins, and business confidence.

• Key findings:

• UK orders drop sharply in Q1, suggesting domestic demand has collapsed

• Businesses hike prices at the fastest pace since 2023, driven by rapidly escalating costs

• As a result, recruitment is lagging behind expectations and confidence has fallen for the third consecutive quarter

• However, output growth is steady following a recent slump

• While investment intentions continue to gradually increase

• Manufacturing forecast to grow by 0.9% in 2026, after contracting in 2025

  
  

Make UK’s latest Manufacturing Outlook report, published, shows that while production edged up in the first quarter of 2026, after a post-Autumn Budget slump at the end of last year, the recovery remains modest and fragile amid persistent uncertainty around orders and costs.

The survey suggests the sector is set to grow by 0.9% in 2026, a slight rebound after contracting by 0.2% in 2025, but the outlook is precarious. Escalating tensions with Iran, and related disruption to shipping routes through the Strait of Hormuz, could push energy prices even higher and further upset global supply chains.

For a sector already facing some of the highest industrial energy costs among major economies, any sustained increase in oil and gas prices could add further pressure to business margins and input costs. Manufacturers are also closely monitoring potential knock-on impacts on shipping costs and delivery times, which could affect access to raw materials and components.

At the same time, rising employment costs following the passing of the Employment Rights Act and increases to minimum wages announced in the Autumn Budget are adding further pressure, helping explain why business confidence has dipped for a third consecutive quarter.

Fhaheen Khan, Senior Economist, Make UK said:

“UK manufacturers have started 2026 on a fragile footing. While output and investment show some improvement after a challenging end to last year, rising costs and weakening domestic demand are creating real pressures for businesses."

“With UK industrial energy costs among the highest in the developed world, any sustained increase in oil and gas prices could quickly push up input costs, squeezing margins and limiting investment."

“Now, more than ever, the Government must act swiftly to deliver its Industrial Strategy and associated measures, including the British Industrial Competitiveness Scheme. These steps are critical to narrowing the UK’s industrial energy cost gap and giving manufacturers the confidence they need to invest, grow, and compete in a volatile global environment.”

According to the Manufacturing Outlook survey, the balance on output in Q1 2026 increased to +21% from +13% in the final quarter of 2025, with the forward-looking balance for the next quarter set to improve further to +35%.

Total orders followed a similar pattern, rising to +21% in the early part of this year and are expected to reach +37% over the next three months.

The balance between export and UK orders was less balanced than the previous quarter, with the former dropping to +18% and the latter to +9%. Both were expected to bounce back in Q2 (export orders to +33% and UK orders to +26%), though this outlook could be affected by developments in the Middle East.

UK prices rose at their fastest rate in nearly three years, with a balance of +31% of manufacturers increasing prices - the highest since Q2 2023. While export prices sit at +34%, a two-year high. Both are expected to increase further in the next quarter.

Recruitment intentions showed signs of recovery from their significant fall to +3% in Q4 2025, rising to +8% in Q1, though high employment costs are slowing this recovery. The modest increase in investment intentions has also continued, rising from +19% to +20%, having bounced back considerably from its +5% level a year ago.