24 January 2024

It has been a challenging time for the UK manufacturing industry. And although a return to growth during this year seems unlikely, the industry should avoid dipping back into recession. In a lower inflationary environment, and with more stability in interest rates and an easing in the labour market, the industry is in a much better position to build resilience. 

However, challenges still remain across demand, supply chain and the wider geopolitical environment. So, to what extent are more certain times on the horizon and what is needed to support the industry in building resilience?

Resilience needed as manufacturing braced for another year of stagnation

The manufacturing industry rebounded quickly from the pandemic, initially growing faster than the wider UK economy. The sector then fell into recession and has since been in decline.  Output now stands at 3.6% below levels in January 2020, compared to growth of 2.8% for the whole economy. The industry has some catching up to do. 

However, 2023 was a year of stagnation for the industry, rather than further decline. By not declining further the sector demonstrated resilience given it was faced with considerable global, political and economic challenges. 

The output, new orders and backlog of work balances of CIPS UK Manufacturing Purchasing Manager’s Index continue to point to a contraction. There are minimal signs of a rapid rebound, making it likely the industry will face another year of stagnation in 2024. The future output index fell significantly during 2023 and the backlogs of work index is now lower than it has been since the initial shock of the pandemic. The post pandemic backlog provided a degree of resilience in 2022, but manufacturers have now worked through this and demand has since been low for an extensive period. As the lagging impact of interest rate rises hits more households, domestic demand is likely to continue to be under pressure in 2024.

This weakened baseline means it wouldn’t take much to tip the sector into recession. With significant geopolitical and economic risks in 2024, further supply chain disruption and challenges within the energy market are likely to put further strain on the sector. With such uncertainty, the health of the industry remains on a knife edge with the baseline of stagnation being the most likely outcome for 2024, barring any significant shocks to the system. 


Labour market

There are signs that the industry labour market is easing, following a period of high vacancies and high employment costs. Although there has been some decline from historic highs in wage growth, it remains above inflation and a strain on costs for manufacturers. 

The average monthly number of vacancies per 100 employee jobs for the industry has gradually declined from a record high at the start of 2021, but is now back approaching pre-pandemic levels. This is in part a reflection of the increasing economic pressure facing manufacturers, and with subdued demand, hiring is likely to remain plateaued. 

However, with the gap narrowing between manufacturing pay growth and the pay growth of the private sector as a whole, the sector may be in a better position to attract and retain talent. This may be further aided as more people look to re-enter the workforce with higher wages in the face of the cost-of-living crisis and with wage growth expected to decline as the labour market loosens into 2024. 

Despite this, the industry is still facing a significant skills crisis. 2/3 manufacturers that took part in our 2023 Make UK survey, wanted to see action taken to address the this through the tax and regulatory environment, stating that they would increase investment in skills if the tax and regulatory regime was improved.



Cost of goods and energy

2023 saw some much welcome relief to manufacturers as energy prices began to decline. However, both natural gas and electricity prices remain above pre-pandemic levels and it will be some time before a return to these levels.

As manufacturing is an energy intensive industry, these recent challenges could boost investment in energy saving technologies and the energy transition. However, investment is needed in national infrastructure as well.

1/3 of manufacturers in our Make UK survey findings stated that poor quality infrastructure is slowing down decarbonisation.


Falling commodity prices has also brought some relief to manufacturers, with input prices falling from a peak of 24.2% year-on-year in June 2021 to down to -2.6% in November 2023. Most significantly, the gap between input and output price rises has narrowed, with signs that output prices could be now increasing above input prices. The impact of this will be some relief to manufacturing margins, which have been squeezed throughout 2022 and 2023. This is much needed to help build resilience in the face of potentially reduced demand.

However, this resilience will be tested by the current geopolitical and economic environment. Challenges to supply chains are already being felt with many shipping companies withdrawing from the Red Sea and Suez Canal, leading to potential cost increases, energy price volatility and delays to shipping.


Capital Investment

Manufacturing is a capital-intensive industry, with long term investment cycles at its core. Recent hikes in interest rates have dampened investment cycles and had a knock-on effect on investment in productivity enhancing technologies. But improving productivity is critical to ensuring the UK industry keeps pace against global competitors. All of this said, it is likely that interest rates have now peaked at 5.25% and although we do not expect rates to be decreased until Q3 2024, some degree of stability will be welcome. 

The pandemic led to a drop in capital investment as many major projects were paused. All things being equal, a rapid spike in capital investment may have been expected during the recovery from the pandemic to reignite these projects, particularly given the government’s much discussed super deduction incentive. However, the rebound never happened, and investment has remained at pre-pandemic levels. 

With lagging productivity, the upcoming AI revolution and the energy transition, significant investment is needed within the UK industry to remain competitive on the global stage. The government has responded to calls from industry to further incentivise capital investment through the introduction of full expensing. 55% of manufacturers in our Make UK survey findings agreed with these calls to government. However more needs to be done for additional targeted support, if the industry is to take advantage of greater certainty around interest rates, energy and commodity prices. 


The AI revolution

The industrial AI revolution is upon us. 2023 saw the launch of a number of generative AI tools that have the potential to introduce a range of productivity enhancements and revolutionise operational, production and development activity. 2024 is likely to see exponential growth and adoption of the technology. 60% of our panel of middle market business leaders believe that generative AI will lead to increased productivity and the technology is likely to fundamentally transform all corners of manufacturing business operations. This is most likely to come from a revolution with data driven decision making resulting from pairing generative AI with process infrastructure, such as real time sensors, process control integrations and digital twinning.

The industry must also consider the associated risk of the technology. Indeed, 2024 is likely to see an increase in the regulatory environment around AI, something that will be welcomed by the 76% of manufacturers panelled within our Make UK survey findings who want to see greater regulation of the technology. 

2024 is also likely to see many manufacturers consider the associated infrastructure investment needed to implement an effective AI strategy. Achieving the full potential of generative AI integration within the production environment will require significant investment, including control and systems integration, real time sensors, digital twinning, and data management. This will also need robust national digital investment, something which UK manufacturers feel is lacking. Our Make UK survey findings also identified that only 44% of manufacturers rated the UK’s broadband infrastructure as good or very good, and 5G investment was the top infrastructure investment priority for the majority of businesses. This is also likely to be a key government consideration going into 2024 to enable the UK to be an AI powerhouse on the global stage. 

What the UK industry needs to build resilience and growth


The current economic headwinds mean UK manufacturers remain vulnerable in 2024. The crucial productivity gap between the UK and global competitors is likely to remain. This is in part due to significant government investment through targeted and long-term industrial strategies that are tackling the economic, supply chain and AI revolution challenges head on. 

Although the UK government made a number of targeted announcements in 2023 including the launch of the Advanced Manufacturing Plan, the decision to make full expensing permanent and further commitment to regional investment zones, these isolated policies are not enough to ensure that UK manufacturers are able to meet their potential and compete on the global stage. An overarching, long term industrial strategy is needed. One that will foster demand, investment and growth for the industry. 

Mike Thornton
Mike  Thornton
Regional Managing Partner, Yorkshire & North-East and Head of Manufacturing
Mike Thornton
Mike  Thornton
Regional Managing Partner, Yorkshire & North-East and Head of Manufacturing
female worker in orange jacket woman in worker uniform

Industrial strategy for manufacturers

As the sector faces various challenges, a long-term vision for manufacturing, supported by an effective industrial strategy is what’s required.