UK Manufacturing Struggles To Regain Momentum

The UK manufacturing sector showed tentative signs of stabilisation in July, but the underlying picture remains fragile as demand softens and cost pressures mount.

Manufacturing output was broadly flat in the three months to July, according to the latest CBI Industrial Trends Survey. Although declines were recorded across a wide range of sub-sectors, these were largely offset by stronger activity in the motor vehicles & transport equipment and food, drink & tobacco sectors. However, manufacturers expect output to fall slightly over the coming quarter to October.

Demand conditions continued to weaken. Total new orders fell during the past quarter, primarily due to a drop in domestic orders, while export orders remained unchanged. Looking ahead, firms anticipate declines in both domestic and overseas orders through to October.

Exporters, in particular, are grappling with growing headwinds. More than half of manufacturers—56%—cited pricing as a key constraint on exports, up significantly from 38% in April. This likely reflects a combination of higher US tariffs and the appreciation of Sterling against the US dollar. In addition, one in five firms reported that quotas and licensing issues are limiting export potential, a level rarely seen since the 1980s.

Cost pressures intensified further. The growth in average costs accelerated for the third consecutive quarter, reaching the fastest pace since January 2023. While both domestic and export prices rose, they failed to keep up with rising unit costs, pointing to a continued squeeze on manufacturers’ profitability. Firms expect domestic prices to rise at an above-average pace over the next three months, while export prices are anticipated to remain flat.

Business sentiment has continued to decline. Optimism among manufacturers deteriorated again in July, with little sign of recovery in investment appetite. Spending plans for the year ahead remain weak across the board, including in buildings, plant & machinery, training & retraining and product & process innovation. Firms highlighted that investment is being held back by uncertainty around future demand, inadequate returns, and persistent labour shortages.

The jobs outlook also remains subdued. Manufacturing employment fell for the third quarter in a row and is expected to decline slightly further in the three months to October. Shortages of skilled labour remain a pressing issue, with more than one quarter of firms citing this as a constraint on output in the next three months.

Ben Jones, Lead Economist, CBI, said: “Conditions in UK manufacturing remain challenging, with many firms reporting subdued and unpredictable demand. High input costs, labour shortages and global supply chain disruptions are continuing to put pressure on margins and capacity."

“Rising labour costs have undermined manufacturers’ external competitiveness. While some exporters are finding opportunities overseas, overall sentiment is cautious, with economic and policy uncertainty weighing heavily on investment decisions."

“What manufacturers really need now is stability—starting with predictability in the tax environment, alongside delivery at pace on the government’s industrial strategy, skills reforms and steps to bring down energy costs. As we look ahead to the Autumn Budget, government must work to reassure businesses to avoid additional uncertainty that could further weaken investment prospects.”

The survey, based on the responses of 304 manufacturing firms, found:

• Output volumes were broadly unchanged in the quarter to July, after falling sharply in the quarter to June (weighted balance of -2%, from -23% in the three months to June). Firms expect volumes to fall slightly in the three months to October (-6%).
  

• A broad range of sub-sectors reported lower output volumes (12 out of 17 sub-sectors), but this was largely offset by higher output in the motor vehicle & transport equipment and food, drink & tobacco sub-sectors
  

• Total new orders fell through the quarter (balance of -17%, from 0%), driven by a decline in domestic orders (-16%), as export order volumes were flat (0%). Manufacturers expect the total volume of new orders to decline in the three months to October (-18%).
  

• Business sentiment continued to deteriorate in July (balance of -27%, from -33% in April). Export optimism for the year ahead also weakened (-26%, from -35%).
  

• Manufacturers’ competitiveness has deteriorated in both EU markets (balance of -13%, from -7%) and non-EU markets (-23%, from -18% in April), with the latter falling at the fastest pace since 2005 in the three months to July. Competitiveness is expected to worsen again in the three months to October (-10% and -13%, respectively).
  

• Investment intentions for the year ahead are weak. Manufacturers expect to reduce investment in buildings (-28%, from -38% in April), in plant & machinery (-15%, from -33%), in training & retraining (-13%, from -20%), and in product & process innovation (-6%, from -22%).
  

• The main constraint on investment was uncertainty about demand (cited by 50% of manufacturers, close to the long run average), followed by inadequate net return (27%), and labour shortages (21%).
  

• Average costs rose in the quarter to July, at the fastest pace since the quarter to January 2023 (+63%, from +48% in April; long run average of +19%). Costs growth is expected to slow in the quarter to October (+41%).
  

• Average domestic prices rose at their fastest pace since January 2023 in the quarter to July (+33%, from +13% in April), and export prices also rose (+19%, from +3%). Domestic prices are expected to rise at a slower pace in the quarter to October (+21%), whereas export prices are anticipated to be unchanged (+1%).
  

• Stocks of work in progress fell in the three months to July (-12%, at the fastest pace in four years). Stocks of raw materials were broadly flat (-1%) and stocks of finished goods rose marginally (+3%).
  

• Manufacturers expect stocks of work in progress (-21%, the weakest expectations since January 2021), of raw materials (-19%) and of finished goods (-6%) to all fall in the three months to October.
  

• Numbers employed fell in the quarter to July (-11%, from -16% in the three months to April). Manufacturers expect numbers to fall again, albeit marginally, in the quarter to October (-5%)