Manufacturing – Sector report
– United Kingdom

Sector rating (Global): Medium Risk

Sector rating (United Kingdom): Medium Risk

The sector has shown resilience in the face of numerous challenges, but many remain cautious about the future. Price pressures persist, with rising input costs and limited ability to pass these on, resulting in hits to profit margins. A key driver of these price increases is the rise in freight costs, as supply chains continue to be strained by the Red Sea crisis and global conflicts. In response, manufacturers are regularly reviewing supply chain risks, opting to dual-source products to avoid dependency on a single supplier for key components.

The budget has drawn mixed reactions, with a headline £40bn tax hike. Of this, £25bn comes from raising employer National Insurance contributions, increasing the rate from 13.8% to 15% and lowering the threshold from £9,100 to £5,000. Businesses warn these changes may lead to job losses, reduced hiring, and lower wages.

Positive measures include a £2.9bn boost for defence, £1bn for aerospace, £2bn to support the automotive sector’s zero-carbon transition, and investment in 11 green hydrogen projects. The rail sector welcomed the completion of HS2’s London-Birmingham section, with funding for tunnelling from Old Oak Common to Euston.

North Sea Oil & Gas faces challenges as the energy profits levy rises to 38%, pushing the total tax rate to 78%. The duty, extended to 2030, now excludes the investment allowance, removing offsets for reinvested capital.

Make UK, the Manufacturers’ Organisation, is urging the Government to release details of the industrial strategy, including the Industrial Strategy Council’s composition and governance, and addressing barriers to growth, such as:

• Advancing the UK CBAM (Carbon Border Adjustment Mechanism) to 2026.
• Reviewing and increasing apprenticeship funding bands.
• Committing to long-term, large-scale infrastructure projects to enhance the UK’s investment appeal.

Many manufacturers have adjusted their supply chain strategies due to geopolitical factors, aiming to secure a more stable supply. While this often comes with a premium, it helps reduce vulnerability to international trade disruptions.

Rerouting containerships around Africa’s Cape of Good Hope, bypassing the Suez Canal, significantly increases travel time and fuel consumption. For Asia-Europe routes, this detour can more than double journey durations, raising CO2 emissions.

To offset delays, many shipping companies are increasing vessel speeds, but this worsens environmental impacts. A 1% speed increase typically leads to a 2.2% rise in fuel use and carbon emissions, according to Sea Intelligence.

The manufacturing sector, defined by long-standing supply chain relationships and a mature, mid-value chain focus, is evolving to prioritise greater certainty. Rigorous due diligence is now common when onboarding suppliers, with businesses increasingly evaluating financial health and ESG credentials.

Operational and financial due diligence are equally critical, conducted by 80% of manufacturers when selecting new suppliers. While ESG assessments are less frequent, their importance is set to rise, becoming a central factor in procurement decisions.

The US remains a vital market for UK manufacturers, but the recent election of President Trump raises concerns about potential tariffs and their impact on supply chains and investment. In the automotive sector, companies without sufficient US production capacity may either absorb the tariffs or pass costs to consumers via higher vehicle prices. Aerospace, still recovering from the pandemic, faces disruption to integrated supply chains, with tariffs on new aircraft potentially driving up airline costs and ticket prices.

 

But it’s not limited to supply chain resilience. In our Global Trade Survey of over 400 UK manufacturers, AI was highlighted as the top digital activity contributing to international development. Key applications include optimising supply chains by monitoring quality, managing inventory, and identifying efficient delivery routes. AI also tracks variables affecting production and logistics, such as weather, labour issues, and material shortages, helping businesses adapt to challenges more effectively.

Figure 4 illustrates other impactful digital activities, such as e-commerce, AI for identifying commercial opportunities, and large language models, showcasing their growing role in expanding international operations.

Labour shortages persist, with over 60,000 vacancies and 2.5 unfilled roles per 100 jobs in manufacturing. Filling both high- and low-skill positions remains critical, with many manufacturers relying on work visas and foreign hires to close skill gaps.

Export growth is increasingly driven by electronics and mechanical equipment, supported by strong EU demand. However, as European manufacturers accelerate digitalisation, competition is intensifying, particularly for UK firms slow to invest. While investment in the sector is rising, high financing costs remain a hurdle, with lower interest rates needed to encourage further spending.

A recovery is expected by 2025, with UK GDP projected to grow by 1.8% and the Eurozone by 1.4%. However, profitability will remain under pressure from sluggish GDP growth, high operating costs, elevated energy prices, rising wages, and ongoing supply chain issues.

In the UK, we expect business insolvencies to stay around 30% above pre-pandemic levels by 2026. Despite the first signs of plateauing, a new high is on track for the full year 2024, with more than 29,000 cases (+5%), which would represent a 12-year record, with a still-larger number of insolvencies in construction, trade and hospitality (18% of the total number of cases, 15% and 14%, respectively). Firms have been struggling over the past years due to the succession of shocks and challenges, from Brexit related issues and the Covid-19 shock, to strong monetary tightening and sticky inflation.

As the UK’s growth momentum should recover heading into 2025, we expect a gradual relief for firms that would translate into slightly lower number of business insolvencies, with around 27,500 and 26,300 cases in 2025 and 2026, respectively.

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