Q4: Confidence weakens further to the lowest level in two years.
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 14 October to 13 December 2024.
- Confidence in the Manufacturing & Engineering sector contracted significantly in Q4 2024 and, while still positive, was significantly below the sector’s historical average.
- Both export and domestic sales growth lagged behind the national average increase and businesses believe this trend will continue over the next 12 months.
- Regulatory requirements were the most widespread growing challenge faced by Manufacturing & Engineering businesses, followed by the tax burden.
- The sector recorded only marginal employment growth in the year to Q4 2024. At the same time, the sector reported the strongest salary growth of any sector in the UK.
- Input price inflation eased in Q4 2024, and companies expect a further slowdown in the coming year.
- Companies in the Manufacturing & Engineering sector plan to reduce the rate at which they grow capital investment and R&D budget growth over the coming year.
Business confidence in the Manufacturing & Engineering sector
Sentiment in the Manufacturing & Engineering sector declined for the second quarter in a row in Q4 2024, with the Business Confidence Index dropping to +1.1, its lowest point in two years. While this score was above the national average (+0.2), confidence dropped below the sector’s historical norm (+5.5).
ONS data suggests that manufacturers are encountering increasing challenges, as output from the sector experienced three successive monthly declines between September and November last year. The 2024 Q4 Bank of England Agents’ Summary of Business Conditions provides further evidence of this decline, stating that demand was already weakening before the Autumn Budget put further strain on the sector. The report stated that optimism for 2025 is waning and highlighted that performance was varied across sub-sectors, with vehicle and other durable goods manufacturers seeing the largest decline in output over the year. The turbulent global market conditions have led to diminished overseas demand and ultimately reduced manufacturing exports to Europe and other markets. The continued uncertainty in the global macroeconomic and geopolitical environment remains a significant obstacle to the Manufacturing & Engineering sector.
Exports and domestic sales growth
Businesses in the Manufacturing & Engineering sector reported a marginal pick up in annual exports growth in Q4 2024, recording a 1.5% rise. However, this increase was among the weakest of any sector in the UK and significantly below the sector’s historical average (2.6%). Companies in the sector project a further climb in exports growth over the next 12 months, anticipating growth of 3.7%. However, the challenging external macroeconomic and geopolitical environment continues to represent significant downside risks to these projections. The export growth predictions are less optimistic compared to many other sectors and are weaker than the 4.0% expected nationally.
Manufacturing & Engineering businesses continue to report weakening domestic sales growth, as growth slowed for the seventh consecutive quarter in Q4 2024. The reported expansion of 1.0% was less than half the sector’s historical average (2.1%) and the weakest reported by any sector. Companies in the sector expect an uptick in growth in the year ahead, with projected growth of 4.0%. However, this remains among the weakest forecasts across all sectors, with the sector set to lag behind the 4.9% increase projected nationally.
Business challenges
Regulation was the most widespread concern for Manufacturing & Engineering companies in Q4 2024. The proportion of companies citing regulatory requirements as a growing challenge rose significantly to 41%, widening the gap to the historical average of 34% and comparable to the national average (40%). Like all other sectors, the tax rises proposed in the Autumn Budget have led to increased concern over the tax burden in the Manufacturing & Engineering sector, as the proportion of businesses citing these challenges rose to 41%, a survey high for the sector that nearly tripled the historical average (14%).
The subdued domestic and export sales growth recorded for the year to Q4 2024 is reflected in the proportion of businesses reporting competition in the marketplace and customer demand as growing challenges. Approximately one in three companies in the sector cited each of these concerns as a rising issue in Q4 2024. Alongside relatively weak demand, many Manufacturing & Engineering companies continued to face problems with overdue payments from customers, with 24% citing late payments as a growing challenge, more than recorded in any other sector.
Labour market
The Manufacturing & Engineering sector reported the largest annual increase in salaries of any sector in the UK in Q4 2024, at 3.6%. While this was a modest slowdown compared to the previous quarter, wage inflation was still nearly double the historical average for the sector (2.1%). The announcement of the increase in the National Living Wage in the Autumn Budget has caused increased concern in the Manufacturing & Engineering sector, with business leaders stating that increased employment costs are hindering growth in the industry. Some moderation in wage inflation is anticipated over the coming year, with salary growth set to ease to 3.1%, however, this is still among the strongest expansions predicted in the UK, only lower than the IT & Communications sector (3.3%).
High salary inflation may have impeded employment growth in the sector, as Manufacturing & Engineering companies reported the lowest increase of any sector in the year to Q4 2024, at just 0.2%. This rise was half the sector’s, already relatively low, historical average of 0.4%. Despite companies in the sector planning to increase the rate of employment growth to 1.2% in the year ahead, this expansion significantly lags behind the projected national average (1.9%).
Input and selling prices, and profits growth
After a modest increase in the previous quarter, annual input cost inflation in the Manufacturing & Engineering sector eased significantly in Q4 2024 to 3.0%, dropping slightly below the historical average (3.1%). This rise in input prices was the lowest reported since Q2 2021 and was also among the smallest increases in the UK, only above the Energy, Water & Mining sector (2.6%). Looking ahead, companies in the sector expect the growth in prices to moderate further over the next 12 months to just 2.5%, marginally below the 2.7% increase anticipated nationally.
Selling price inflation continued to ease in Q4 2024, as businesses in the sector raised their selling prices by just 2.3%, down from 2.6% in the previous quarter. Like input cost inflation this was the lowest increase since Q2 2021 and was below the national average increase of 2.5%. Companies in the sector plan to ease price growth slightly further in the year ahead, marginally closing the gap to the historical average (1.8%), with an anticipated rise of 2.2%.
Despite relatively weak sales growth and sustained wage inflation in the year to Q4 2024, Manufacturing & Engineering companies reported a modest uplift in profits growth to 2.9%, climbing above the historical average (2.5%). However, even with this increase, the sector was still behind the national average of 3.3%. Over the next 12 months, businesses expect a significant uplift in profits growth to 4.7%, but this is below the 5.0% rate projected across the UK as a whole.
Investment
Capital expenditure growth in the Manufacturing & Engineering sector increased marginally from the previous quarter in Q4 2024, to 2.3%. Even with this increase, this expansion was lower than most sectors and behind the national average of 2.6%. Investment growth is expected to moderate over the next 12 months, to just 1.8%, however this will still be marginally ahead of the historical average (1.7%) and matches the average growth projected across all sectors.
Meanwhile, Manufacturing & Engineering businesses reported a marginal uptick in R&D budget growth in the year to Q4 2024, outpacing the national average of 1.6%. Companies in the industry anticipate growth will slow significantly in the year ahead to 0.9%, less than half of the historical average (2.1%) and below most other sectors in the UK economy.