The latest national Business Confidence Monitor (BCM) for Q1 2024 shows a significant improvement in sentiment compared to weak yet positive confidence in the previous quarter and the average for 2023. The index rose above its pre-pandemic average for the first time since Q1 2022, as economic prospects brightened.
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 January to 22 March 2024.
- Sentiment remains positive in the Manufacturing & Engineering sector, but after only a modest improvement in Q1 2024 it now lags behind most sectors.
- Export and domestic sales growth softened further in Q1 2024, however, businesses anticipate improvements in both over the next 12 months.
- Regulatory requirements were the most widely cited growing challenge for businesses in the Manufacturing & Engineering sector, followed by transport problems, likely linked to Red Sea shipping delays. Customer demand remains a prominent concern.
- Employment growth picked up in Q1 2024 but remains below the rate of expansion seen nationally. However, companies within the sector expect a notable acceleration in job creation over the next year.
- Input price inflation moderated further but, while selling price inflation also eased somewhat, the sector saw the highest growth in Q1 2024. Businesses expect a significant slowdown in both in the year ahead.
- Capital investment and R&D budget growth was comparatively strong in Manufacturing & Engineering in the past 12 months. However, while R&D spending is expected to continue on a similar trajectory, businesses plan to scale back their capital investment growth.
Business confidence in the Manufacturing & Engineering sector
After declining in the preceding three quarters, sentiment in the Manufacturing & Engineering sector improved in Q1 2024. The Business Confidence Index increased marginally to reach +9.7, remaining above the historical average of +5.4. The continued easing of input price expansion as well as the anticipated recovery in real incomes and consumer spending, as CPI inflation edges closer to the 2% target, are likely contributing factors to this rise in confidence. Despite this improved sentiment, confidence within the sector is behind the national average of +14.4, with external global supply chain problems and faltering international demand likely still weighing on confidence levels within the sector. The latest ONS statistics report that conditions for manufacturers are improving but remain challenging, as output from the sector climbed by 1.3% in February 2024, the sharpest increase since June 2023, having dipped in January.
Exports and domestic sales growth
Manufacturing & Engineering exports continued to rise in Q1 2024, although the rate of expansion continued to slow for the fourth successive quarter. This growth left exports 1.3% above the level seen a year before, less than half the historical average growth rate (2.7%). High costs and weaker international demand are contributing to this comparatively sluggish growth rate, with costlier ocean freight rates due to the ongoing disruption in the Red Sea, further exacerbating the issue. Companies within the sector anticipate a notable pickup in export sales growth over the next 12 months, with an expected increase of 4.3%, although they are likely still aware of the downside risks associated with the current challenging global macroeconomic and geopolitical environment. As a result, Manufacturing & Engineering companies are slightly less optimistic about the coming year compared to the UK average (4.7%).
Domestic sales growth has been stronger, with annual growth of 2.2%, broadly in line with the historical average (2.1%). However, this was still the slowest expansion since Q2 2021 and underperformed most other sectors in the UK economy. While a modest uplift is forecast in the year ahead, the 3.7% expected rise is the most pessimistic in the UK, significantly below the national average of 5.2%.
Business challenges
After declining in the previous quarter, regulatory requirements have once again become the most widespread issue for businesses in the Manufacturing & Engineering sector. In Q1 2024, 39% of companies within the sector reported regulatory requirements as a growing challenge, marginally above the historical average of 35% for the sector.
There was an increase in the proportion of companies citing transport problems as a growing concern. More than one in three companies within the Manufacturing & Engineering sector cited it as a growing challenge, the highest proportion of any sector within the UK economy. This uplift is most likely due to delays related to the disruption in the Red Sea.
The easing of inflation and recovery of real household incomes has likely boosted consumer spending. However, customer demand remains a prevalent issue for businesses in the sector, with 33% of companies reporting it as a rising challenge.
The proportion of companies citing the availability of non-management skills as a growing challenge has been on a downward trend since Q3 2022, however the Manufacturing & Engineering sector continues to see the highest prevalence of this issue in the UK. This is likely linked to the lingering impacts of Brexit on the free movement of workers from the EU, as well as the relative skill shortages evident in the UK labour market compared to the pre-pandemic norm. Competition in the marketplace, staff turnover and concerns over the tax burden are also prominent challenges for businesses within the sector.
Labour market
After slowing throughout 2023, annual employment growth in the Manufacturing & Engineering sector lifted to 1.4% in Q1 2024. While this is above the historical average for the sector (0.4%), it is notably lower than the 2.0% increase witnessed nationally. However, companies within the sector are increasingly optimistic about the coming year, with job growth expected to rise by 2.5% in the coming year, below only the Business services and IT & Communications sectors. However, the National Living Wage was set to increase from April 2024, likely impacting some businesses in the sector, particularly those with a larger concentration of lower-paid workers and, longer-term, increased automation and adoption of new technology in the sector is likely to impact employment growth.
Manufacturing & Engineering companies continued to see strong salary growth in the year to Q1 2024, with a 4.3% rise. Indeed, the sector saw the joint-highest rise in labour costs of any sector over the past 12 months. Perhaps factoring in April’s increase in the National Living Wage, businesses within the sector expect only a modest slowdown in salary growth to 3.7% in the year ahead. This expected growth is more in line with the national average (3.5%) but is higher than most other sectors.
Input and selling prices, and profits growth
Input cost pressures in the Manufacturing & Engineering sector continued to ease in Q1 2024, as price inflation fell to 4.1% compared to 4.9% in Q4 2023. This rise in prices was the lowest expansion rate for the sector since Q2 2021 and was also lower than the increase recorded nationally (4.7%). With national CPI inflation continuing to edge toward the Bank of England target rate, companies within the Manufacturing & Engineering sector are increasingly optimistic that the worst of the recent inflationary pressures are behind them. Businesses within the sector expect price inflation will decline further in the coming year, with a rise of 2.5% anticipated, taking input price inflation below the historical average of 3.1% for the first time since Q2 2021.
The recent trends in the Manufacturing & Engineering sector’s input prices have been reflected in annual selling price inflation, which fell to 3.7% in Q1 2024. However, this was still above any other sector and over double the historical average (1.7%). Companies within the sector expect selling price increases will moderate significantly in the coming 12 months, with growth of 2.4% anticipated, marginally below the expected economy-wide average rate of 2.6%.
Despite a modest contraction compared to Q4 2023, companies within the Manufacturing & Engineering sector recorded profits growth of 2.9%, outperforming the national average (2.4%). This above-average performance was likely aided by the comparatively strong increase in selling prices within the sector. Companies expect the rate to improve to 4.1% in the coming year but will be outperformed by most other sectors.
Investment
The Manufacturing & Engineering sector experienced the largest increase in capital investment in the year to Q1 2024 as companies in the sector seek to improve their production processes. The 3.5% rise in capital investment was also over double the historical average (1.7%) for the sector. In the next year, businesses expect to increase their capital investment at a lower rate of 1.6%, matching the national average. This slowdown reflects that, despite growing confidence about future activity, factors including ongoing uncertainty and high borrowing costs are impacting future investment decision. In addition, businesses in the Manufacturing & Engineering sector may feel less need for higher rates of investment. The Q1 2024 survey found that 63% of companies in the sector were operating below capacity in the past year, the highest rate of any sector.
R&D budget growth was also among the strongest in the UK in the year to Q1 2024, with the sector recording a rise of 2.4%, only behind IT & Communications. Companies plan similar growth in the year ahead, with R&D budgets in Manufacturing & Engineering set to expand by 2.5%, outpacing both the expected national average rate (1.6%) and the historical average (2.1%).
