Fears about the state of the UK economy are growing as it emerged that the manufacturing sector has shrunk by around 4% this year and is expected to shrink by a further 3.2% in 2023.
Rising raw material costs, falling consumer demand, staff shortages and higher borrowing costs have combined to form a perfect storm for the UK manufacturing sector, according to the latest Make UK/BDO forecast report. Investment in the sector was “negative” for the first time in almost two years, the study found.
The report suggests that the manufacturing sector is likely to shrink by 7% by the end of next year, although the report’s authors pointed out that the 4% drop for this year is relative to a strong year in 2021, which saw a rebound from the pandemic.
The dire figures come as Bank of England policymakers weigh whether to raise interest rates again on Thursday.
Make UK said it had consistently revised down its forecasts for output growth in 2022 from 3% in March to 1.7% in July, then 0.6% in September and now, a contraction of -4.4%, which highlighted the extent to which conditions have deteriorated. .
As well as lowering its forecasts for manufacturing, Make UK is predicting GDP growth of 4.4% this year and a contraction of 0.9% next year. More than 330 companies were surveyed as part of the report.
In November, the British Chambers of Commerce reported that manufacturing fell by 2.3%, marking the worst three-month performance since the 1980s.
Stephen Phipson, chief executive of Make UK, said: “The outlook for next year and possibly beyond simply cannot be sugar coated… The UK risks sleepily accepting that little or no growth is the norm. There is an urgent need for government to work with industry to ensure a long-term industrial strategy that focuses on national and regional growth.”
Phipson called on ministers to help alleviate labor shortages by temporarily easing the migration system and extending tax relief for work-related training. It also wants a rethink on recent decisions on research and development tax credits for small businesses “to ensure that manufacturers are not deterred from investing in critical innovation”.
Richard Austin, BDO’s national head of manufacturing, warned that it was unclear how the new government intended to build the right longer-term environment in which the sector could plan effectively.
News that the manufacturing sector is struggling will be noticed in the Bank of England. On Thursday, the nine members of the Monetary Policy Committee (MPC) will make a decision on an interest rate that could raise not only the cost of borrowing for businesses, but also the amount millions of mortgage holders have to pay their banks each month.
Most analysts expect the key rate to rise from 3% to 3.5%, the highest rate in 14 years.
The expected 0.5% increase will represent a slight cooling in interest rate hikes after the Bank’s MPC opted for a 0.75% increase last month – the biggest single hike since 1989.
Deutsche Bank suggested interest rates could rise to 4.5% next year, a departure from the bank’s previous forecast of 5.25% last month. The rate hike threatens to put additional pressure on households already struggling with higher energy bills.
Later on Monday, the Office for National Statistics (ONS) will release gross domestic product (GDP) data for October. GDP contracted by 0.2% in the third quarter of the year as households and businesses grappled with rising inflation.