The latest national Business Confidence Monitor (BCM) for Q4 2023 shows a slight shift in sentiment within the quarter. However, the quarter-on-quarter improvement in sentiment is marginal, remaining broadly steady at a similar level over the last few quarters. Overall confidence continues to fall short of the pre-pandemic average.
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 17 October to 15 December 2023.
- Sentiment in Manufacturing & Engineering has remained in positive territory in Q4 2023 at a similar level to the previous quarter. Business confidence is higher than most sectors and above the historical average.
- Exports and domestic sales growth weakened in Q4 2023, but businesses expect both to accelerate in the year ahead.
- Customer demand is now the most widely cited growing concern in the Manufacturing & Engineering sector, followed by regulatory requirements. Competition in the marketplace also continues to reemerge as a prominent issue while labour market challenges are easing.
- Employment growth slowed significantly as salary growth remains elevated, although it is down from the record high reported in the previous quarter as inflationary pressures continue to ease.
- Input price inflation slowed notably while selling price inflation also fell, although both rates remain elevated. Businesses expect a significant slowdown in both in the year ahead.
- The overall investment picture appears relatively healthy in Manufacturing & Engineering as capital investment growth is in line with the sector’s historical average and R&D spending is growing faster than most other sectors which is expected to be maintained.
Business confidence in the Manufacturing & Engineering sector
The Business Confidence Index for the Manufacturing & Engineering sector remained fairly steady at +6.1 in Q4 2023, slightly down from +9.5 in the previous quarter, but still in positive territory. Although businesses in the Manufacturing & Engineering sector became less optimistic through 2023, they are more confident in Q4 2023 than their historical average and are more optimistic than companies in most sectors. A significant easing of input price inflation and solid profit growth alongside the rebound in the automotive manufacturing sector has likely supported business confidence and, although export and domestic sales growth are relatively weak this quarter, companies are optimistic about the coming year. Indeed, ONS statistics showed that output from the manufacturing sector increased in November 2023 by 0.3% following a fall in the previous month, marking the first monthly growth since June 2023.
Exports and domestic sales growth
Exports are rising in the Manufacturing & Engineering sector, though the rate of increase has eased for the third quarter in a row. With exports 1.5% higher in Q4 2023 than a year prior, growth is now less than half the pace recorded in the previous quarter, and weak by historical standards for the sector. While this is striking it is not surprising given difficulties in global market conditions, not least in mainland Europe where, for example, Germany’s manufacturing sector continues to suffer. And while Manufacturing & Engineering companies predict a notable improvement in export growth over the next 12 months, reaching 4.1%, they are also likely to be aware of wider downside risks to the global economy, including the potential for geopolitical events to impact energy prices and global supply chains. Indeed, the outlook for export performance in the sector is stronger than most sector predictions.
Domestic sales growth in the Manufacturing & Engineering sector steadily improved from early 2021, but this trend has been largely reversed since Q2 2022 and continued to ease for the third consecutive quarter in Q4 2023. In the year to Q4 2023, domestic sales in the sector were up by 2.7%, a more modest rise compared to the UK as a whole (3.6%). Businesses are, however, more optimistic about growth prospects over the next 12 months and anticipate the rate of increase to accelerate to 4.4%, which, if achieved, is more than twice the sector’s historical pace (2.1%) but slower than the predicted rate for most sectors.
Customer demand overtook regulatory requirements to become the most widespread issue for businesses in the Manufacturing & Engineering sector. In Q4 2023, 39% of companies cited customer demand as a growing challenge, up from the previous quarter, while the proportion reporting regulatory requirements fell to 32%. However, both of these challenges are below their historical averages for the sector.
Competition in the marketplace continues the rising trend of recent quarters as it reemerges as a prominent issue for the Manufacturing & Engineering sector, with almost one in three companies citing it as a growing challenge. It was a more significant issue for businesses during the last decade but started to decline in 2017 and fell sharply during the pandemic. Concern over the tax burden, although slightly lower than the previous quarter, is high by the sector’s historical standards. Around a quarter of businesses cited it as a growing challenge, double the historical average and in line with the UK.
However, some business challenges have eased in the latest quarter, particularly labour market challenges. Concern over the availability of non-management skills, which had been significantly widespread through 2022, has been easing through 2023 and in the latest quarter, 29% of businesses cited it as a growing challenge. Likewise, staff turnover concerns have fallen drastically in recent quarters, with 18% of companies reporting it as an increasingly difficult issue. This is the lowest level of staff turnover concern since early 2021 and is broadly in line with the historical average for the sector.
Manufacturing & Engineering companies have had a challenging year, particularly in terms of employment growth, which has been trending down over recent quarters. Indeed, the pace at which companies increased their staff levels slowed further in the year to Q4 2024 and nearly stagnated, with growth of just 0.4%, though this matches the historical average for the sector. Modest improvements are expected in Manufacturing & Engineering, as companies plan to raise their staff levels by 1.8% in the coming 12 months. That said, factors like the higher National Living Wage scheduled in April 2024 could impact this outlook for some companies, particularly those with a higher proportion of lower-paid workers, which are more common in some sectors including parts of the Manufacturing & Engineering sector. Longer-term increased automation is also likely to impact employment growth in the sector.
Salary growth remains elevated as businesses in the Manufacturing & Engineering sector increased wages by 4.5% in the year to Q4 2023. This is slightly down from the record high recorded in the previous quarter but is still more than double the historical average and faster than most sectors. Companies expect salary growth to remain elevated in the coming year at 3.7%, again higher than most other sectors, and companies may already be anticipating upward pressure from the National Living Wage in the near term.
Input and selling prices, and profits growth
The Manufacturing & Engineering sector saw a notable easing of input cost pressures in Q4 2023 as input price inflation fell to 4.9%, down from 6.8% in the previous quarter. This is the lowest input price inflation has been since mid-2021 and puts the sector broadly in line with the national average. It is, however, well above the historical average for the sector (3.1%). Companies are optimistic that input cost pressures will ease in the year ahead. Indeed, at 2.3%, the expected input inflation rate is the lowest of any sector and is below the historical average, suggesting that the worst of the recent inflationary pressures have passed.
This fall in input price inflation has been partially reflected in the Manufacturing & Engineering sector’s selling price inflation rate, which has moderated to 4.6% in the year to Q4 2023. This is more than double the sector’s historical norm and also the highest rate of any sector in the UK. However, businesses anticipate that selling price inflation will moderate in the year ahead as input cost pressures continue to ease to normal levels. As such, they plan to increase selling prices by 2.4% in the next 12 months, broadly in line with the predicted rate for the national average.
Despite weak sales growth, profits grew at a healthy rate similar to the previous quarter, likely reflecting the easing of input cost pressures for businesses. Manufacturing & Engineering profits increased by 3.2% year-on-year in Q4 2023, higher than the historical and UK averages. This is expected to accelerate further in the next 12 months to 4.9% as both domestic and export sales growth recover, making Manufacturing & Engineering among the best performing sectors in terms of predicted profit growth.
Capital investment growth in the Manufacturing & Engineering sector has been fairly steady in Q4 2023 compared to the previous quarter. With growth of 1.9% year-on-year in Q4 2023, it is broadly in line with the historical average for the sector as well as the UK level, and businesses are planning to maintain this rate of growth over the next 12 months.
The R&D picture is similarly healthy as companies in the Manufacturing & Engineering sector increased their R&D budgets by 2.7% year-on-year in Q4 2023, up from 0.7% in the previous quarter. This is one of the strongest rates of any sector, with only IT & Communications having a larger increase in R&D spending. Although this is expected to fall to 1.7% in the coming year, it will still be higher than the predicted rate for the UK.