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Manufacturing sector shows rebound in Q2, easing recession fears

Manufacturers are experiencing a rebound in activity during the second quarter, alleviating concerns of a severe recession in the sector, according to the Make UK/BDO Q2 Manufacturing Outlook survey. The survey, conducted between May 5 and 24, reveals a positive outlook driven by strong demand in the Other Transport and Electronic sectors, particularly in Other Transport (mainly aerospace) with a robust balance of output at +82%.

Make UK and BDO attribute this growth to the continued recovery in the aerospace sector, fueled by increased passenger miles and a surge in orders for new aircraft over the past year. Additionally, the electronics industry is witnessing strong balances as companies invest in digitalization and expand capacity to counter labor shortages. These investments are translating into consistently strong balances for the South East, where electronics stands as the second-largest industrial sector.

Despite the positive conditions, Make UK still anticipates a slight contraction in manufacturing for 2023, although the outlook is considerably better than the significant contraction predicted at the end of the previous year and in Q1. The survey also highlights persistent skills shortages and high labor demand, resulting in minimal signs of wage growth easing. In April, one-fifth of pay settlements were at 5%, while a further 15% were at 6% or higher.

James Brougham, Senior Economist at Make UK, emphasizes the gradual nature of the industry’s improvement, stating, “Manufacturers are seeing a gradually improving picture, but the word ‘gradually’ is doing a lot of heavy lifting. Substantial challenges still remain, and without an overarching industrial strategy, growth prospects will remain anaemic at best.”

Richard Austin, BDO’s National Head of Manufacturing, points out that despite some alleviation of pressures in the first half of the year, the UK market still faces long-term systemic challenges and built-in inefficiencies that require urgent attention. Austin highlights supply chain pressures as an endemic issue, particularly for medium-sized firms, with continued disruptions and increased costs both domestically and internationally. Policymakers must address these issues promptly to avoid tepid growth for UK manufacturing while neighboring countries forge ahead.

The survey indicates a slight increase in the balance of output from Q1 (+24% compared to +21%), with expectations of similar levels in the next quarter at +22%. Although total orders declined slightly to +21% from +28% in Q1, companies are optimistic about increased orders in Q3, with a projected balance of +27%. UK orders also experienced a minor dip to +15% from +20% in Q1 but are expected to recover to +21% in Q3. Export orders saw a rise from +12% to +15%, although a slightly weaker outlook is anticipated in the next quarter at +12%.

Recruitment intentions remain stable, indicating a continued scramble to attract and retain talent, with a balance of +18% (+19% in Q1) and a substantial improvement expected in the next quarter at +30%. These employment balances have remained at elevated levels since the EU referendum, except for the initial quarters of the pandemic. Investment intentions, while still positive at +10%, declined from 14% in the first quarter, possibly reflecting the transition from the super-deduction scheme to the benefits of full expensing.

Make UK and BDO forecast an overall output contraction of 0.3% for this year, a significant improvement from the -3.3% contraction in Q1 and the -4.4% forecast at the end of last year. However, Make UK maintains its previous growth forecast of just 0.8% for 2024. UK GDP growth is projected at 0.4% for 2023 and 1.3% for 2024.

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