The latest national Business Confidence Monitor (BCM) for Q2 2024 shows a sustained increase in confidence and is now at its highest level for two years, as businesses expect falling input price inflation to support further growth in demand and improved profits in the year ahead.
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 15 April to 22 June 2024.
- Sentiment in the Manufacturing & Engineering sector improved marginally in Q2 2024 but was lower than all sectors apart from Retail & Wholesale.
- Domestic sales growth softened further in Q2 2024, however there was a modest pickup in exports growth and companies anticipate improvements in both over the next 12 months.
- Customer demand was the most widespread growing challenge for the Manufacturing & Engineering sector, followed by competition in the marketplace and regulatory requirements.
- Employment growth increased in Q2 2024, matching the national rate of expansion. However, companies within the sector expect to slow the rate of job creation in the next 12 months.
- Input price inflation continued to soften in Q2 2024, however there was a modest increase in selling price inflation. Companies expect a significant slowdown in both in the coming year.
- Companies within the Manufacturing & Engineering sector expect above-average growth in both capital investment and R&D budget growth in the year ahead.
Business confidence in the Manufacturing & Engineering sector
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Sentiment in the Manufacturing & Engineering sector improved for the second consecutive quarter in Q2 2024, however it remains one of the least optimistic sectors in the UK economy. The Business Confidence Index experienced only a modest uplift to +10.7 from +9.7 in the previous quarter, moving further above the historical average of +5.4, but it was only stronger than the Retail & Wholesale sector.
Confidence in the sector continues to lag behind the national average of +16.7, with increased transport costs related to shipping bottlenecks and weak domestic demand still weighing on the sector. This shaky foundation is reflected in the latest ONS data, as output within the manufacturing sector fell by 1.6% in April but returned to growth in May with a 0.4% rise. The sector is clearly struggling to gather sustained momentum due to the challenging economic climate both domestically and internationally, though businesses anticipate trading conditions will improve in the coming 12 months.
Exports and domestic sales growth
Export sales growth in Manufacturing & Engineering picked up in Q2 2024 for the first time since Q1 2023, rising by 2.5%. This expansion was broadly in line with the historical average of 2.6%. This growth comes in spite of a challenging international economic environment with increased transport costs caused by ongoing supply chain bottlenecks related to shipping. Businesses within the sector are predicting a further uplift in export growth in the coming year, with an anticipated rise of 3.4%. However, the challenging external macroeconomic and geopolitical environment continues to represent significant downside risks to these projections. Given this context, companies are somewhat less optimistic compared to the UK-wide export expectations of 4.5%.
Domestic sales growth in the Manufacturing & Engineering sector continued on its downward trajectory in Q2 2024, falling for the fifth consecutive quarter to 1.5%. Not only was this below the sector’s historical average of 2.1% but it was also the weakest expansion of any sector in the UK economy. While an improvement is expected in the year ahead, businesses within the sector are still projecting the weakest growth in the UK, at 4.2%, notably lagging the national average of 5.3%.
Business challenges
The weak domestic sales performance in the year to Q2 2024 has been reflected in an uplift in the proportion of companies citing customer demand as a rising challenge. Now, 36% of companies within the Manufacturing & Engineering sector reported customer demand as a growing concern, making it the most widespread challenge for businesses within the sector, although this was still marginally below the sector’s historical average of 42%.
Following close behind is competition in the marketplace and regulatory requirements, with 35% of businesses within the sector reporting these as growing concerns. Both concerns were marginally above the historical average (both 34%).
Other prevalent challenges include late payments from customers (24%) and the availability of non-management skills (26%), with the latter more prominent in the Manufacturing & Engineering sector than any other sector in the UK economy. This challenge is at least partially linked to the lingering impacts of Brexit on the free movement of workers from the EU and the continued relative skill scarcities in the UK labour market following the Covid-19 pandemic.
Labour market
Despite the high proportion of companies citing the availability of non-management skills as a growing concern in Q2 2024, employment growth in the Manufacturing & Engineering sector improved for the second quarter, rising by 1.8%. This matched the national average growth rate but, more notably, was over four times the historical average for the sector (0.4%). The Manufacturing & Engineering sector has moved toward increased automation and incorporating new technologies in recent years instead of increasing staff levels, hence the low historical average growth. Companies plan to ease the rate at which they increase their staff levels in the year ahead to 1.4%, a rate that is among the slowest projected and only ahead of the Retail & Wholesale and Property sectors.
April’s increase in the National Living Wage will undoubtedly be a contributor to the strong salary increase recorded by businesses within the Manufacturing & Engineering sector. These companies recorded the joint-highest growth of 4.0% in Q2 2024, almost double the historic average (2.1%). Labour supply issues will also likely feed into this comparatively high growth rate, as the ONS vacancy rate for the sector remains elevated compared to its pre-pandemic norm. Companies anticipate wage inflation to remain high, with only a modest reduction in the growth rate to 3.6% anticipated in the coming year, outpacing all other sectors in the UK economy.
Input and selling prices, and profits growth
Input price inflation in the Manufacturing & Engineering sector eased further in Q2 2024, recording the lowest price increase of any sector in the UK at just 3.3%. This was the lowest price increase since Q2 2021 but remains marginally above the sector’s historical average of 3.1%. With national CPI inflation reaching the Bank of England’s target of 2% in May, businesses within the Manufacturing & Engineering sector are confident that further moderation will occur in the year ahead. Overall, companies within the sector expect input prices will rise by 2.1% over the next 12 months, a smaller increase than the projected national rate of 2.7%.
Previous increases to input prices for Manufacturing & Engineering businesses were passed on to customers in Q2 2024, with the sector recording the highest selling price inflation in the UK. Prices rose by 3.9%, over double the historic average of 1.7% for the sector. However, similar to input price inflation, companies in the Manufacturing & Engineering sector plan to bring the rate of selling price inflation back in line with the national average (2.3%) over the next 12 months, with an anticipated expansion of 2.2%.
With companies reporting customer demand as the most prevalent growing challenge as well as weak sales growth in the past year, it appears that the premium in the increase of selling prices compared to input price inflation, was a key contributor to the uptick in the sector’s profit growth in Q2 2024. Profits increased by 3.6% over the year, marginally outpacing the national average of 3.1% and a notably larger expansion than the sector’s historical average of 2.5%. Companies within the Manufacturing & Engineering sector expect further uplifts in profit growth over the next year, with an expected increase of 4.9%. However, even with this accelerated growth, the sector’s projected profit growth is lower than the national average of 5.5%.
Investment
After recording the highest annual increase in capital investment growth in the previous quarter, companies in the Manufacturing & Engineering sector scaled back growth to 1.9% in Q2 2024. This increase remained marginally above the historical average (1.7%) but was one of the weakest growth rates in the UK, only stronger than the Construction and Property sectors. However, the Manufacturing & Engineering sector is one of the few that plans to increase capital expenditure growth over the next 12 months, with a 2.5% expansion anticipated. The sector’s high propensity toward automation and adoption of new technologies means that companies are expecting to outpace the national average (2.1%) over the next year.
Manufacturing & Engineering businesses recorded the strongest R&D budget growth in the year to Q2 2024 of any sector in the UK economy. Growth picked up from the previous quarter to 2.8%, a notably sharper increase than the national average of 1.9%. Companies within the industry expect growth to moderate slightly in the year ahead to 2.5%, however this expansion will remain ahead of the 2.1% historical average and will continue to be among the strongest growth rates in the UK.
