Manufacturing sector goes into contraction for first time in 2 years

UK manufacturing suffered its steepest contraction since May 2022 in August, with high energy bills and job vacancies among the biggest worries in a ‘potent cocktail’ of issues reported by firms.

The monthly UK Manufacturing Purchasing Managers’ Index (PMI) for August, compiled by S&P Global and the Chartered Institute of Procurement & Supply (CIPS), fell below the positive 50-mark for the first time in 27 months as companies experienced a “sharp reversal” in new orders.

Many of the manufacturers surveyed cited clients postponing, rescheduling or cancelling agreements in light of “rising economic uncertainties, recession warnings and component shortages”. Lower demand from key export markets such as the US, EU and China, as well as ongoing supply chain disruption, also led to a reported contraction in export business.

Meanwhile, the pass-through of general inflation, exchange rates, force majeure events and the Ukraine crisis have continued to contribute to cost increases.

The bad news has been corroborated by insolvency figures seen by The Guardian, which show that insolvencies across the manufacturing sector have already soared by around two thirds since last year, ahead of a wave of expected business failures expected this winter.

Eyewatering rises in energy bills top the list of concerns for many businesses. According to manufacturers’ organisation Make UK, energy costs are now causing major disruption for half of companies, with some facing a five-fold rise in bills or more from October.

Stephen Phipson, Chief Executive of Make UK, said:

“Whilst industry has recovered strongly over the last year, we are clearly heading for very stormy waters in the face of eyewatering increases in energy costs and a difficult international environment.  This threatens to shatter expectations of a sustained recovery from the pandemic.”

A lengthening list of unfilled vacancies is also a huge concern for many manufacturers. Make UK has estimated that there were around 93,000 live vacancies in the manufacturing sector as of August, but recruitment problems associated with skills shortages, increasing costs and employees leaving for better paying jobs are making them extremely difficult to fill.

Jane Gratton, Head of People Policy at the British Chamber of Commerce, described the problem as a ‘ticking timebomb’:

“Skills and labour shortages have reached crisis points for many firms. The impact is being felt on their ability to meet customer demand and forcing some to turn away new business, because they simply do not have the human resource. This is restricting growth and business confidence. It is a serious and urgent problem.”

In addition to much-needed government intervention, she added:

“Businesses must be part of the solution too by creating the right workplace conditions, for example by providing flexible working practices, training opportunities and a focus on workplace healthcare and support.”

Elsewhere, experts have indicated that there is at least some cause for optimism in manufacturing when it comes to supply chain disruption. John Glen, Chief Economist at CIPS, explained:

“While the Ukraine crisis, container and component shortages are still holding back UK manufacturers, there are signs that the worst supply chain disruption is now behind us. Raw material price increases are finally starting to slow, backlogs of work are declining, and prices on store shelves are starting to stabilise.”

GC Business Growth Hub is able to support SME manufacturers in Greater Manchester with fully-funded expert guidance on reducing energy bills and other costs, as well as alleviating recruitment difficulties through workforce development and people management. For more information, contact one of our Manufacturing Advisors today.