Q3 2025: Confidence climbs above the UK average but remains in negative territory.
The latest national Business Confidence Monitor (BCM) shows that business sentiment deteriorated further into negative territory in Q3 2025. This increased pessimism is underpinned by elevated concern over the tax burden, as well as above-average inflation and weak domestic and exports sales growth eroding businesses’ profit margins.
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 14 July to 24 September 2025.
- Business confidence in Manufacturing & Engineering improved in Q3 2025, rising to its highest level in almost a year, but sentiment remains in negative territory.
- Manufacturing & Engineering recorded the weakest exports and domestic sales growth of any sector in Q3 2025, but businesses expect both will improve over the coming year and rise above their respective historical averages.
- The tax burden remained the most prevalent growing challenge for Manufacturing & Engineering businesses, with citations reaching a new survey record high.
- Input price inflation eased below the sector historical average and further moderation is expected in the year ahead.
- Employment declined in the 12 months to Q3 2025, but businesses expect a rebound over the coming year.
- Capital expenditure and R&D budget growth both remain below their respective historical averages and the investment outlook for the year ahead is muted.
Business confidence in the Manufacturing & Engineering sector
Following four consecutive quarterly declines, business sentiment in the Manufacturing & Engineering sector improved in Q3 2025, rising to its highest level since Q4 2024, but it remains in negative territory. The Business Confidence Index increased to -3.6 from -14.0 in the previous quarter, climbing above the national average (-7.3) but still sits significantly below the sector’s historical norm (+4.9).
Businesses in Manufacturing & Engineering have faced turbulent conditions throughout 2025. The latest monthly GDP data from the ONS show that after a modest increase in June, output from the sector declined significantly in July, dropping by 1.3%. The 2025 Q3 Bank of England Agents’ Summary of Business Conditions reports that some of the weight on UK businesses from US tariffs and geopolitical concerns has been lifted now that a number of trade deals have been announced, including the UK-US trade deal which lowered tariffs on UK-built cars from 25% to 10%. However, businesses remain concerned about how US trade policy and ongoing geopolitical tensions may suppress global demand.
Domestically, significant challenges remain, including April’s uplifts to the National Living Wage and employers’ National Insurance Contributions, with employment in the sector declining and the tax burden still the primary concern. Locally, the Jaguar Land Rover cyber-attack upset production in the Midlands regions with the government providing financial support in late September, after the survey period had ended.
Exports and domestic sales growth
Companies in the Manufacturing & Engineering sector reported that annual exports growth slowed for the second consecutive quarter in Q3 2025, dropping to just 0.8%. This expansion is the weakest of any sector, lagging significantly behind the UK average growth of 2.4%. Over the coming year, businesses expect growth will rise above the sector’s historical average (2.6%), accelerating to 3.3%. However, this outlook is weaker than the previous quarter, despite uncertainty about the global trading environment easing.
Meanwhile, Manufacturing & Engineering businesses recorded an uptick in annual domestic sales growth in Q3 2025, though the 1.5% increase was also the softest rise of any UK sector, at half the UK average rate of 3.0%. Companies in the sector are more positive about the year ahead and expect growth will improve to 4.4%. This projected increase is more than double the sector’s historical average (2.0%) and above the 4.0% expansion anticipated across the UK economy.
Business challenges
Like most other sectors, Manufacturing & Engineering companies are still adjusting to the challenges posed by April’s uplift in employers’ National Insurance Contributions, as citations for the tax burden reached another survey record high in Q3 2025. Of the companies surveyed in the sector, 61% reported the tax burden as a rising challenge, nearly four times the sector’s historical norm (16%) and comparable to the national average (60%). Significant uncertainty persists as businesses remain wary of any further tax rises that could be announced in the November Budget.
Regulatory requirements remain a prevalent challenge for Manufacturing & Engineering companies, cited by 39% of business surveyed in the sector as a growing concern in Q3 2025, down slightly from the previous quarter but still above the historical norm of 35%. Prominent too are reports about customer demand (38%) and competition in the marketplace (32%), though both dropped below their respective historical norms this quarter.
Labour market
The larger dependence on typically lower-paying jobs meant that Manufacturing & Engineering companies were more exposed to the increases in National Living Wage and employers’ National Insurance Contributions in April. Since then, the sector has undertaken significant restructuring of its labour force, resulting in a 0.3% decline in employment levels in the year to Q3 2025. This drop was the weakest outturn since Q1 2021 and lagged the national average growth rate of 0.9%. As a result, companies in the sector reported an uptick in labour market related issues in Q3 2025, with the availability of non-management skills cited as a rising issue by 21% of businesses, marginally ahead of the national average (20%). The availability of management skills was also a more prevalent challenge for Manufacturing & Engineering companies compared to most other UK sectors, cited by 16% of companies compared to 13% nationally.
Companies in the Manufacturing & Engineering sector have comparatively high expectations for employment growth over the year ahead, with the 1.7% projected increase ahead of the national average forecast (1.2%), and over four-times the sector’s historical norm (0.4%).
Following the uptick in the previous quarter, Manufacturing & Engineering businesses reported that annual salary inflation softened slightly to 3.0% in Q3 2025. This growth was broadly in line with the national increase (3.1%), but significantly above the sector’s historical average (2.1%). While most other sectors anticipate a slowdown in annual salary growth, Manufacturing & Engineering companies predict that growth will follow a similar trajectory, rising by 3.1% over the next 12 months. This projected increase is the strongest of any sector, outpacing the 2.7% rise forecast across the UK.
Input prices, selling prices and profits growth
Manufacturing & Engineering businesses reported that annual input price inflation eased below the sector’s historical norm (3.1%), slowing to 2.8% in Q3 2025. This rise in input prices was the smallest increase since Q1 2021, lower than the UK average of 3.8% and softer than recorded in all other UK sectors. Manufacturing & Engineering companies predict input price growth will slow to 2.4% over the next 12 months, which is a slower pace than the national average forecast of 3.0%.
As input price inflation has softened, businesses in the Manufacturing & Engineering sector have also reduced the rate at which they raised selling prices in the year to Q3 2025, to 2.1%. This increase was the smallest recorded rise since Q2 2021 and was marginally below the UK average growth of 2.2%. Over the coming year, companies in the sector expect selling price inflation to ease below the historical norm (1.8%), with a projected increase of 1.6%, also lower than the national average expectation of 1.9%.
Despite the softening of both input price inflation and wage growth in recent quarters, lacklustre sales are eroding profit margins in the Manufacturing & Engineering sector. This trend is reflected in the Bank of England Agents’ Summary of Business Conditions, which stated that margins remain tight for most contacts in the sector. The BCM shows that Manufacturing & Engineering businesses reported annual profits growth of just 1.9%, lagging the UK average increase of 2.3%. Looking ahead, trade deals and easing tensions in the global trading environment have eased some of the uncertainty facing the Manufacturing & Engineering sector, with companies expecting a marked uplift in profits growth to 5.3% over the next 12 months, a stronger forecast than the national average (4.1%) and more than double the sector’s historical norm (2.5%).
Investment
Capital investment growth in the Manufacturing & Engineering sector increased slightly compared to the previous quarter in Q3 2025, to 1.5%, but remains below both the sector historical norm (1.7%) and the UK average (1.8%). Businesses plan to maintain this rate of growth over the coming year, which is slightly lower than the UK average projected rise of 1.7%.
Meanwhile, Manufacturing & Engineering businesses slowed their annual R&D budget growth to just 1.1% in Q3 2025, widening the gap to the sector’s historical average (2.1%) and below the national increase (1.8%). Companies plan to increase growth slightly to 1.3% in the year ahead, but again the projection for the sector lags the UK expectation (1.6%).