Q2: Sentiment in Manufacturing & Engineering slides back into negative territory.
The latest national Business Confidence Monitor (BCM) shows that the Iran War significantly dented confidence as it dropped to a near four-year low and suffered its sixth successive negative quarterly score. Companies reported rising costs pressures, weaker expected sales and profits growth for the coming year, while late payment concerns hit a five-year high.
The survey results are based on 1,000 telephone interviews among ICAEW Chartered Accountants covering a range of UK sectors, regions and company sizes, ensuring a representative picture of the UK economy. The latest quarterly findings are based on the period 13 April to 19 June 2026.
- Business confidence in Manufacturing & Engineering fell to -13.7 from +1.7 in Q1, just above the UK average (-14.6).
- Export and domestic sales growth slowed in the year to Q2 2026, though prospects, particularly for exports, are expected to improve.
- Geopolitical risk, energy costs and transport problems were widely cited challenges amid heightened global uncertainty, alongside prevalent concerns about customer demand, taxation and regulations.
- Despite easing slightly, annual salary inflation remains elevated and businesses expect wages will grow in line with the UK average next year.
- Input price inflation edged up in the year to Q2 2026 and companies passed some of these increased costs onto customers by raising their selling prices at a sharper pace.
- Businesses are cautious about capital investment prospects and plan to limit growth below the sector norm but intend to expand R&D budget growth.
Business confidence in the Manufacturing & Engineering sector
Business sentiment in Manufacturing & Engineering fell sharply in Q2 2026, with the Business Confidence Index dropping from +1.7 in Q1 2026 to -13.7. While sentiment is marginally ahead of the UK average (-14.6) it remains well below the sector’s historical average (+4.5).
Escalating uncertainty and disruption linked to the Middle East weakened confidence and performance across UK Manufacturing & Engineering, compounding existing tariff-related pressures on goods exporters. Companies reported that export sales growth slowed sharply in the year to Q2 2026, while domestic sales growth also eased with the Bank of England’s March 2026 Agents’ Summary noting that soft demand persists across most sub-sectors. Aerospace and defence remain notable outliers as they continue to benefit from the geopolitical environment. While the Society of Motor Manufacturers and Traders (SMMT) stated that there was a welcome rise in UK car production in the month of May, production was still down 8.7% over the five-month period to May 2026, compared with the same period in 2025.
Exports and domestic sales growth
Annual exports growth in Manufacturing & Engineering slowed to just 1.1% in Q2 2026, below the UK average (3.1%) and the weakest growth of any UK sector in the period. While developments in US–Iran relations will likely shape future prospects, companies anticipate an acceleration over the next 12 months to 3.9%, broadly comparable to the 4.0% rise forecast nationally which, if realised, would lift growth above the sector’s historical average (2.5%).
Annual domestic sales growth also eased back to 1.9% in Q2 2026, from 2.2% in the previous quarter, lagging behind the 3.6% rate recorded nationally. Businesses are more optimistic about the year ahead, projecting growth of 3.4% and, while this is weaker than the 4.7% rise forecast nationally, it is markedly above the sector's historical norm (2.0%).
Business challenges
With the Iran War ongoing through much of the survey period, geopolitical risk was cited as a rising challenge by 76% of Manufacturing & Engineering businesses. Newly added to the survey this quarter (Q2 2026), this concern was more widely reported than any other sector in the UK, notably above the national average (65%). The sharp rise in oil and gas prices prompted 64% of companies in the sector to register energy prices as a growing challenge, also exceeding the national average (55%). The widespread disruption, particularly to shipping and supply chains, led to a sharp rise in the proportion of Manufacturing & Engineering businesses reporting transport problems as a rising challenge which, at 37% in Q2 2026, is close to double the sector norm (20%).
With international and domestic sales growth easing this quarter, customer demand was cited as a rising challenge by 42% of businesses in the sector, up from 37% in Q1 2026. This proportion was in line with both the sector's historical norm (42%) and the national average (40%).
There are numerous other challenges where concern remains elevated in the Manufacturing & Engineering sector. Labour costs were cited as a rising challenge by 54% of businesses, up from 52% in Q1 2026 but below the national average (58%), while the tax burden was reported at over twice the historical norm (18%) at 41% and regulatory challenges were noted by 39% of businesses.
Labour market
Employment growth has been weak in the Manufacturing & Engineering sector in recent quarters, and businesses reported annual expansion of just 0.1% in Q2 2026, the weakest of any UK sector and below the 1.4% rate recorded nationally. Companies predict a rise in recruitment activity over the next 12 months to 1.6%, close to the UK projection (1.5%) and above the historical norm (0.4%).
Despite cooler labour demand, annual wage growth in the Manufacturing & Engineering sector remained high at 2.7% in Q2 2026. Though down from 3.1% in the previous quarter and below the UK average (3.1%) it was well above the sector norm (2.2%). Companies expect wage pressures to persist, predicting they will raise pay by 2.7% next year, matching the UK projection.
Input and selling prices, and profits growth
Annual input price inflation in the Manufacturing & Engineering sector lifted to 4.0% in Q2 2026, from 3.4% in the previous quarter but broadly in line with the UK average (4.1%). While most sectors expect input price inflation to ease next year, businesses in Manufacturing & Engineering, alongside those in Retail & Wholesale, expect input price inflation to rise further. Companies predict input inflation of 4.1% next year, compared with the 3.8% rise forecast nationally, anticipating that the rate will continue well above the sector's historical norm (3.1%).
Businesses are passing on some of their additional costs to customers, as the sector reported stronger annual selling price growth in Q2 2026, at 3.1%, up from 2.9% in the previous quarter and outpacing the 2.5% rate recorded nationally. Businesses intend to maintain growth at 3.0% over the next 12 months, above the UK-wide projection (2.4%) and the historical average (1.8%).
Rising costs and slowing sales have inevitably dented profits growth in the sector. Manufacturing & Engineering businesses reported annual profits growth of 2.0% in Q2 2026, down from 2.5% in the previous quarter and below the 2.8% rate recorded nationally. Companies predict a notable uplift to 4.7% over the next 12 months, matching the UK projection, and above the sector's historical norm (2.4%).
Investment
Companies in the Manufacturing & Engineering sector recorded the weakest annual capital investment growth of any UK sector in Q2 2026, at 1.1%, down from 1.5% in the previous quarter and below the 2.7% rate recorded nationally. This recording marked the sixth consecutive quarter where investment growth fell short of the sector’s historical average (1.7%). Businesses remain cautious about the year ahead, planning growth of 1.3%, lower than the national projection (1.8%).
Annual R&D budget growth was also softer in Q2 2026, at 2.2%, down from 2.5% in the previous quarter but broadly tracking the 2.0% national rate. Companies expect a marked acceleration over the next 12 months, projecting 2.6%, compared with the 1.8% rise forecast nationally, holding growth above the sector's historical norm (2.1%) if achieved.