25 April 2023
It may be cliché to use phrases like ‘green shoots of recovery’ to illustrate the tentative optimism building within the manufacturing sector this spring. It may also be a little premature. Significant growth for the UK economy remains a distant hope for many economists, including our own.
Nonetheless, the outlook for the manufacturing sector does not look as bleak as it did mid-winter.
Our topical survey of more than 400 middle market business leaders, explored how prepared the middle market is for the upcoming tough economic conditions. The results go some way to demonstrating why tentative positivity is growing, particularly within manufacturing.
Energy cost anxiety falling
In January, our survey respondents identified higher energy costs as their single biggest risk. Of course, for manufacturers, the impact of high energy costs is particularly profound given the levels of energy required for production. However, since the start of 2023, UK energy prices have dropped quickly for both natural gas and electricity. Prices are still significantly higher than before the pandemic and before Russia’s invasion of Ukraine, and if the last twelve months has taught us anything, it’s that these prices can be volatile. That said, the Office for Budget Responsibility’s latest Economic and Fiscal Outlook from March 23 forecasts energy prices to stabilise and fall further throughout 2023 and into 2024. The Government’s ‘Energy Bills Discount Scheme’ will also give businesses discounted energy rates until 1 April 2024. The industry’s greatest concern in recent months, is steadily becoming less concerning.
Building back margins
Beyond just energy, soaring input costs more generally have been a constant battle for business leaders within the manufacturing industry. Squeezed margins have become common place and for many this has resulted in severe working capital constraints. But again, there are signs that some of these issues might just be abating.
IHS Markit’s PMI business survey suggests that following the rapid input price rises seen by manufacturers since the pandemic began, input cost inflation is still rising, but, importantly, much more slowly than it has been. This is now enabling manufacturers to start building back some of the margins that have been squeezed for such an extended period.
Supplier delivery time woes – a thing of the past?
According to the latest Suppliers Delivery Time Index, the last time manufacturers could access materials and components this quickly was around the 2008-2009 recession. A potentially troubling thought and a staggering turnaround given the issues many have faced over the past 12 months. There are many potential conclusions one can reach, not least whether supply chain worries are now being replaced by concerns over future demand.
Encouragingly though, the new orders index has moved beyond 50 (the tipping point that suggests orders are increasing) for the first time since May 2022. Conversations with clients and the volume of high-profile investment announcements are also suggesting many businesses are now feeling confident enough to push ahead with investment decisions. Britvic, Barratt Developments, Ideal Heating, Essar Group, Bentley Motors, VCS and many more have all announced or moved forward with major investment plans since the turn of the year. Jaguar Landrover's recent £15bn electric car investment announcement that will convert its production plant in Halewood into the firm's first 'all electric' facility is particularly encouraging for the future of UK automotive manufacturing and for the business' 3700 local employees. Indeed, our January survey showed that of those respondents that expect to access more finance in the next 12 months, 44% stated they would be using it for capital investments – and conditions have improved further since January. With all of this in mind, it is likely that the sector’s supply chain resilience is going to be tested yet again over the next quarter as demand builds. These are probably challenges that the industry will welcome given their familiarity and last year’s severe recessionary concerns.
What areas should manufacturers prioritise over the next quarter?
Supply and demand: While we all hope for some stability, and there is some evidence suggesting there might be some around the corner, these are still volatile times. As geopolitical tensions and strict coronavirus policies continue to cause many to decrease reliance on China, the principles that successful manufacturers have always employed continue to be absolutely vital. Supply chains are likely to be put under more pressure during the second half of the year as the industry copes with an increase in demand. Closely monitoring and reviewing supply chains and generating accurate demand forecasts will be hugely important if the sector is to make the most of better trading conditions and adjust their operations accordingly.
The investment landscape: The Government knows that capital investment in the UK is below that of comparable countries. For many manufacturers, as trading conditions improve, making investments to optimise operations or to drive innovation will shift even further up the priority list, particularly given the sector’s long standing productivity and labour supply issues.
At the Spring Budget, there were numerous announcements designed to incentivise UK manufacturers to invest over the coming years. Given the benefits on offer, manufacturers, particularly those within key future sectors such as green industries, life sciences and advanced manufacturing, should take note of the announcement of ‘investment zones’ across the Midlands and the North.
The additional announcement of full expensing commenced on 1 April 2023 and will apply for the next 3 years. Despite being a year longer than the previous ‘super deduction’ scheme, 3 years remains a narrow window for manufacturers to complete on any new investment plans, particularly given we are due another general election before the expiry of this incentive. It is therefore advisable to push ahead with investment plans if benefitting from this new regime is a priority.
While for some manufacturers the worst turbulence may seem to be diminishing, it will not be the case for all.