'Eye-watering' costs leave manufacturers facing 'stormy waters'

20 June 2022

The government has been accused of using “gesture politics” to tackle soaring costs as investment in the UK’s manufacturing sector “nosedives”. 

Higher prices risk becoming the “new normal” for manufacturers if input costs around wages, commodities and fuel keep “spiralling upwards” due to factors including Russia’s war in Ukraine, Covid-19 and Brexit, according to trade body Make UK and accountancy firm BDO. 

In a joint report, Manufacturing Outlook 2022, the organisations warned: “Ministers must do whatever it takes to support businesses and protect jobs if our economy is to avoid another annus horribilis.”

The report found for the third quarter in a row the growth of output and orders slowed as the post-pandemic boom continued to dissipate, while rising prices were putting international customers off UK goods.

Stephen Phipson, chief executive at Make UK, said: “Whilst industry has recovered strongly over the last year we are clearly heading for very stormy waters in the face of eye-watering costs and a difficult international environment. This threatens to shatter expectations of a sustained recovery from the pandemic.” 

Richard Austin, head of manufacturing at BDO, said: “Rapidly-rising input costs, ballooning energy bills and in some cases inflation-busting pay settlements have hit margins and frozen investment plans. There is now a strong case for government action to help UK manufacturers weather the immediate storm and incentivise investment for long-term growth.”

Vacancies in the sector are at a record high and over double the previous 20-year average, the report found, with 4.1 roles unfilled per 100 employed. The average figure previously stood at 1.9. 

The report warned: “Margins have tumbled this quarter as businesses struggle to find efficiency gains and higher prices turn off some customers. For the moment, robust demand is keeping industry going but there are fears that this may be coming to an end.” 

While the UK is facing the same global issues as other countries, Brexit is “[holding] back export growth”, meaning the UK is “underperforming compared to other economies”. 

The report said consequential trade disruptions meant investment plans are being pushed back or “cancelled entirely” due to their impact on cash-flow. 

Smaller companies are being hit the hardest by cost increases. Large companies – classed as those with a turnover of £25m plus turnover – showed output performance almost twice as strong as those companies in the smallest turnover bracket of £0-£9m – a significant hit as the majority of the UK’s manufacturing base is made up of SMEs.

The report said supporting the manufacturing sector was integral to supporting the government’s Levelling Up agenda. “Manufacturing firms are often the bedrock of the ‘left behind’ regions of our economy,” it said. 

“Their success is imperative if the escalating cost of living crisis is to be tackled. But as it stands, employee recruitment has slowed and investment intentions are in retreat because business confidence is down.”

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