When we published our Industrials Outlook for 2026, the narrative for UK manufacturing was cautiously improving. Inflation was easing, energy prices had stabilised and early signs of recovery were appearing in survey data. The sector appeared to be edging back towards expansion.

2026 is no longer a recovery year

The macro environment has deteriorated significantly since the start of 2026. Renewed geopolitical disruption and a fresh energy shock linked to the conflict in Iran have created sharp drop in growth expectations. At the same time, parts of the manufacturing sector continue to show resilience, thanks largely to earlier order momentum, structural demand in defence and aerospace and accelerating adoption of digital and AI driven technologies.

For manufacturers, 2026 is no longer looking like a straightforward recovery year. Now it’s likely to be a test of adaptability and how companies can balance cost pressure, operational disruption and weak demand against productivity investment, resilience and long term competitiveness.

The UK macro backdrop: weaker growth and higher inflation risk

Consensus forecasts now place UK GDP growth for 2026 below 1% as a result of slower domestic demand, elevated energy and freight costs and deteriorating business confidence. Inflation expectations are also higher, particularly in the second half of the year, as oil, gas and logistics costs feed through supply chains.

For manufacturing, this matters more than headline GDP. The combination of softening end markets and renewed cost pressure is squeezing margins when many firms are still recovering from the 2022 energy crisis. While PMI readings continue to point to pockets of resilience, output volumes, order balances and forward expectations have weakened across most subsectors.

Against this backdrop, the six megatrends identified in our original outlook are evolving fast:

The most significant change since our outlook is the re emergence of acute energy and input cost pressures.

In late 2025, easing inflation and stabilising energy prices supported expectations of a gradual margin rebuild. Today, the Iran conflict is driving a renewed surge in oil, gas and electricity prices, resulting in UK manufacturers facing another energy shock. But this time, we are starting from a weaker macro starting point and without price cap protection.

Unlike 2022, rising costs are feeding into an already soft demand environment. Manufacturers are attempting to pass on increases, but pricing power remains limited. PMI data shows rising output prices alongside sharply higher input costs, increasing the risk of margin compression as the year progresses.

Energy intensive subsectors, including basic metals, chemicals, glass, paper and transport are particularly exposed. For many, fixed price energy contracts may delay the impact but not avoid it. Cost resets are likely for many businesses over the next 12 months. The late 2025 optimism that 2026 would be a margin repair year has faded and cost discipline, working capital control and selective investment are back to the top of board agendas.

Sustainability remains a defining theme for industrials but the motivation has sharpened.

Higher energy prices have reinforced the commercial case for decarbonisation. Particularly where investments reduce absolute energy consumption, improve efficiency or provide greater control over power costs. Electrification of heat, waste heat recovery and onsite generation are no longer long term ambitions but strategic balance sheet and resilience decisions.

Policy developments add further complexity. The expansion of the British Industrial Competitiveness Scheme from 2027 offers potential future relief on electricity costs, but provides little near term mitigation. At the same time, the path towards a UK carbon border adjustment mechanism introduces uncertainty for energy intensive exporters, particularly those involved in steel and basic materials.

UK manufacturers certainly face a more fragmented outlook compared with the EU, where decarbonisation policy is increasingly aligned with competitiveness and security. Sustainability investments in 2026 therefore need to be more targeted, focused on cost saving rather than transformational bets.

Momentum is continuing to accelerate in digitalisation and AI adoption. Since our outlook at the start of the year, the shift from experimentation to execution continues to gather pace. Most manufacturers are now actively deploying AI across predictive maintenance, quality control and process optimisation. The focus has broadened from isolated pilots to plant level and network wide optimisation. AI is increasingly viewed as a productivity tool rather than a headcount reduction lever. Survey data indicates most firms actually expect to hire more workers due to productivity gains.

The macro environment is reinforcing this trend. With demand growth constrained and margins under pressure, productivity has become the primary route to earnings growth. AI enabled improvements in uptime, yield, energy management and cycle time offer one of the few scalable levers available in 2026. But execution is still uneven with integration with core operational systems, data quality and governance all continuing to limit scale up. This risks further widening the productivity divide between early adopters and laggards.

As digitalisation accelerates, cyber security is a central operational risk for manufacturing businesses. Recent ransomware and network intrusion incidents across automotive, electronics, medical devices and industrial groups show the vulnerability of increasingly connected plants. For manufacturers operating lean inventories and just in time supply chains, the cost of downtime has also risen sharply.

Since our original outlook, we have seen a growing recognition that cyber risk is an operational continuity issue as well as a data or compliance one. Attacks that disrupt production lines or supplier connectivity can have immediate financial and reputational consequences.

In response, manufacturers are extending zero trust principles into operational technology environments, increasing network segmentation and linking cyber resilience more closely to safety and uptime metrics. In 2026, cyber investment is increasingly being justified on the same basis as maintenance or asset reliability spend.

One of the central messages of our original outlook was that disruption is no longer episodic. The past six months have reinforced that with disrupted shipping routes, constrained access to critical materials and unpredictable price fluctuations for aluminium, polymers, rubber and petrochemical derivatives. For manufacturers, particularly tier two and tier three suppliers, elevated freight rates and volatile input markets are feeding directly into costs and delivery risk.

In response, businesses are shifting from emergency rerouting towards structural resilience: dual sourcing, supplier diversification, increased safety stocks and greater visibility across lower tier suppliers. But what has changed is the cost trade off. With capital constrained and margins under pressure, resilience initiatives need to be carefully targeted. The priority is not eliminating risk, but managing it without eroding returns or overstretching balance sheets.

Skills shortages persist across engineering, maintenance, controls and data literate operational roles, particularly in aerospace, defence and advanced manufacturing. Demographic pressures and an ageing workforce continue to limit supply. Encouragingly, employment indicators have shown tentative improvement, with hiring intentions stabilising as manufacturers adapt to higher labour costs and redesign roles around human machine collaboration.

The framing of talent strategy is changing rapidly though. The focus is less on cost containment and more on upskilling and retention, ensuring employees can work alongside increasingly digital operations. In a low growth environment, talent is a productivity investment rather than a variable cost.

What’s next for industrials in 2026?

The UK industrials sector enters the second half of 2026 facing more headwinds than anticipated six months earlier. Growth is weaker, inflation risks are higher and energy costs have returned as a defining challenge.

But the insight of our original outlook still holds. In a flat demand environment, competitiveness will be determined less by volume growth and more by execution. Targeted investment, productivity gains, resilience and disciplined capital allocation are going to make the real difference moving forward.

The winners in 2026 will not be those waiting for macro conditions to improve, but those compounding marginal gains across energy efficiency, digital capability, supply chain resilience and workforce productivity even as the external environment remains unsettled.

To discuss what these trends mean for your business, please get in touch with Emily Sawicz.

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