Fears are growing over the state of the UK economy as it emerged that the manufacturing sector has shrunk by around 4% this year and is set to shrink another 3.2% in 2023.
Rising raw material costs, falling consumer demand, staff shortages and rising borrowing costs have collectively formed the perfect storm for Britain’s manufacturing sector, according to Make’s latest outlook report. UK/BDO. The study showed that investment in the sector turned “negative” for the first time in almost two years.
The report suggests that the manufacturing sector should be 7% smaller by the end of next year, although the report’s authors pointed out that the 4% drop for this year is relative to a strong 2021, which experienced a pandemic rebound.
The dire figures came as Bank of England policymakers weighed whether to raise interest rates again on Thursday.
Make UK said it had consistently revised down its forecast for manufacturing growth in 2022 from 3% in March to 1.7% in July, then 0.6% in September and now a contraction of -4.4 %, highlighting how much conditions have weakened.
In addition to lowering its forecast for the manufacturing sector, Make UK predicts GDP growth of 4.4% this year but a contraction of 0.9% next year. More than 330 companies were interviewed for the report.
In November, the British Chamber of Commerce said the manufacturing sector fell 2.3% to record the worst three-month performance since the 1980s.
Stephen Phipson, Managing Director of Make UK, said: “There is simply no sugar coating on the outlook for next year and possibly beyond…the UK is in danger of becoming sleepwalker in accepting that little or no growth is the norm. The government must urgently work with industry to put in place a long-term industrial strategy focused on growth at the national and regional levels.
Phipson called on ministers to help ease labor shortages with a temporary relaxation of the migration system and to extend the tax exemption for work-related training. He also wants a rethink of recent rulings on research and development tax relief for small businesses “to ensure that manufacturers are not deterred from investing in critical innovations”.
Richard Austin, national head of manufacturing at BDO, warned there was little clarity on how the new government plans to create the right long-term environment in which the sector can plan effectively.
News that the manufacturing sector is struggling will be noted at the Bank of England. On Thursday, the nine-member Monetary Policy Committee (MPC) will make an interest rate decision that could not only drive up the cost of borrowing for businesses, but also the amount millions of mortgage holders owe. pay to their banks every month.
Most analysts expect the base rate to rise from 3% to 3.5%, its highest rate in 14 years.
The expected 0.5% rise will represent a slight slowdown in rate hikes, after the Bank’s MPC opted for a 0.75% hike last month – the biggest single increase since 1989.
Deutsche Bank has hinted that interest rates could hit 4.5% next year, moving away from the bank’s previous forecast of 5.25% last month. Rising rates threaten to put additional pressure on households already struggling with higher energy bills.
Later on Monday, the Office for National Statistics (ONS) will publish its gross domestic product (GDP) figure for October. GDP fell 0.2% in the third quarter of the year as households and businesses struggled with runaway inflation.