The latest national Business Confidence Monitor (BCM) for Q3 2024 shows a slight drop in sentiment. However, confidence remains high as businesses continue to expect sales and profits growth to improve significantly in the year ahead.
The latest Business Confidence Monitor (BCM) for Q3 2024 shows a slight drop in sentiment but confidence remains high as businesses continue to expect sales and profits growth to improve significantly in the year ahead.
The survey results are based on 1,000 telephone interviews among ICAEW Chartered Accountants covering a range of UK sectors, regions and company sizes, ensuring a representative picture of the UK economy. The latest quarterly findings are based on the period 15 July to 20 September 2024.
- Sentiment dropped slightly in the Manufacturing & Engineering sector in Q3 2024 and, while positive, it remains below the national average.
- Both export and domestic sales growth eased further in Q3 2024, however, businesses expect improvements over the next year.
- Customer demand continues to be the most widespread growing challenge for the Manufacturing & Engineering sector, followed by regulatory requirements.
- Employment growth softened in Q3 2024, dropping below the national average, but companies expect a modest uplift next year. However, labour market challenges are more prominent in the sector than their respective historical and national averages.
- After easing in the previous three quarters, input price inflation picked up in Q3 2024, however, companies expect a significant slowdown over the next 12 months.
- Businesses in the Manufacturing & Engineering sector plan to slow capital investment and R&D budget growth in the year ahead.
Business confidence in the Manufacturing & Engineering sector
After growing in the previous two quarters, sentiment in the Manufacturing & Engineering sector dipped in Q3 2024 but remains positive. The Business Confidence Index dropped marginally from +10.7 in Q2 2024 to +8.9 and while this is still above the sector’s historical average of +5.5, it remains below the national average of +14.4.
The Bank of England Agents summary report for Q3 2024 reports that manufacturing growth remains weak, but contacts continue to predict a modest pick-up in the pace of growth for the rest of this year and into 2025. The report highlights the differences in activity across manufacturing sub-sectors, with aviation and pharmaceuticals up on last year, but durable goods output remains lower than a year ago and construction machinery and materials output remains weak. Sub-sectoral differences are reflected in the latest ONS outputs statistics and show that output in August increased in 9 of the 13 manufacturing sub-sectors, with transport equipment (which includes motor vehicles and aerospace) the largest contributor to growth in the month. The ONS data suggests that conditions for manufacturers are improving but remain challenging, as output from the sector climbed by 1.1% in August 2024, having dipped by 1.2% in July. Overall, the ONS estimates that output from the manufacturing sector was up 0.5% in the three months to August 2024. Meanwhile, the September UK Manufacturing PMI suggested that subdued market conditions in Europe and the US were key contributors to declining overseas demand. The ongoing volatility in the global macroeconomic and geopolitical environment continues to pose downside risks to the Manufacturing & Engineering sector.
Exports and domestic sales growth
The Manufacturing & Engineering sector recorded the weakest exports growth of any sector in the year to Q3 2024, with a rise of just 0.6%, significantly below the 2.6% historical average for the sector. Companies in the sector expect a significant uplift in exports growth in the coming 12 months, climbing above the historical average, with a predicted increase of 3.2%. However, this is still among the weakest projections across all sectors, with companies less optimistic than the national average of 4.0%.
Annual domestic sales growth in the Manufacturing & Engineering sector eased for the sixth consecutive quarter, with a rise of just 1.1% in the year to Q3 2024. This was almost half the historical average of 2.1% and the weakest growth of any UK sector. A significant uplift is expected in the next 12 months, with sales projected to climb above the historical average, with an anticipated increase of 4.0%, but this is lower than the national forecast average of 5.1%.
Business challenges
The relatively poor domestic and export sales growth in the year to Q3 2024 has been reflected in a spike in the proportion of Manufacturing & Engineering businesses reporting customer demand as a growing challenge. Customer demand was the most widespread concern in the sector, with 48% of companies citing the challenge as a rising issue and the highest it has been since Q1 2021. The challenge is more prevalent in Manufacturing & Engineering than all sectors apart from Retail & Wholesale (51%).
Regulation continues to be a major challenge for the sector. The proportion of companies citing regulatory requirements as a growing challenge increased marginally to 37%, rising above the historical average of 34%. It was the second-most prevalent concern for businesses in the sector.
Financial challenges including late payments from customers (26%) and the tax burden (27%) have become increasingly prominent concerns for Manufacturing & Engineering companies. Late payment from customers was cited by the highest proportion of businesses since Q2 2015 and the issue was only more prevalent in the IT & Communications sector. Meanwhile, the proportion of companies reporting the tax burden as a rising challenge was almost double the historical average (14%) for the sector.
Labour market
After rising in the two previous quarters, annual employment growth in the Manufacturing & Engineering sector slowed to 1.2% in Q3 2024. While this growth was below the national average of 1.8%, it was also three times the sector’s historical average of 0.4%. However, it was broadly comparable to the average growth the sector has reported over the last two years (1.4%) and businesses anticipate a marginal uplift to 1.4% in the coming year.
The Manufacturing & Engineering sector reported one of the highest increases in wages growth across all sectors in Q3 2024, at 3.9%. This growth was faster than all sectors apart from Energy, Water & Mining and nearly double the historical average (2.1%). The upward pressure on salaries is at least in part a likely consequence of the lingering impacts of Brexit, inhibiting the free movement of workers from the EU as well as the continued relative skill shortages in the post-COVID-19 UK labour market. This trend is reflected in the prevalent labour market challenges cited by companies in the Manufacturing & Engineering sector. The availability of non-management skills (27%) and management skills (18%) as well as staff turnover (25%) were all more prominent than both their respective historical and national averages in Q3 2024. Over the next 12 months, companies in the sector expect the rate of salary growth to moderate to 2.9%, in line with the national average (2.9%).
Input and selling prices, and profits growth
After easing in the previous three quarters, annual input price inflation in the Manufacturing & Engineering sector picked up in Q3 2024, as input prices rose by 3.7%. This was marginally below the 4.2% growth seen nationally but remained above the historical average (3.1%) for the sector. National CPI inflation has returned to more manageable levels and companies in the Manufacturing & Engineering sector expect input prices to moderate further in the coming year, to just 2.2%, marginally below the 2.4% increase anticipated across the UK as a whole.
Selling price inflation had been following a similar trajectory to input price growth in recent quarters, however, the growth in selling prices continued to ease in Q3 2024, to 2.6%, matching the national average. Businesses in the sector predict further softening in prices growth over the next 12 months, closing the gap to the historical average (1.8%), with an anticipated rise of 2.1%.
The combination of sluggish sales growth and persistent cost and wages inflation have resulted in a decline in profits growth compared to the previous quarter, to just 2.5%. This growth matched the sector’s historical average but was marginally behind the national average of 2.8%. Companies in the Manufacturing & Engineering sector anticipate a significant uplift in profits growth in the next 12 months, with an expected increase of 4.7%. However, despite this pick-up, the sector’s projected profits growth is lower than the projected national average rate of 5.1%.
Investment
Capital investment growth in the Manufacturing & Engineering sector eased marginally from the previous quarter in Q3 2024, to 1.8%. This growth was lower than most sectors and behind the national average of 2.4%. Similar growth is expected over the coming year, with a projected increase of 1.7%, and while this would equal the historical average, businesses in the sector expect lower increases than companies in all other sectors apart from Transport & Storage.
After recording the largest increase in the year to Q2 2024, R&D budget growth in the Manufacturing & Engineering sector slowed to 1.4% in Q3 2024. This was marginally behind the UK average of 1.7%. Companies in the sector plan further moderation in the coming year to 1.0%. The intended growth is lower than the national average (1.2%) and less than half the sector’s historical average (2.1%).
