Growth remains positive but slowdown evident

Many companies are increasing their costs by at least 10 per cent and with little pushback, it seems UK customers are accepting the inflationary rise according to the survey results.

According to the Make UK/BDO Q4 Manufacturing Outlook survey, UK prices rose from a balance of +50 per cent in Q3 to +52 per cent in Q4 with an expected increase to +58 per cent in the next quarter. These are the highest balances in the survey’s history.

The survey found that prices had increased for the fourth quarter in a row, and expected to continue into 2022 while output volumes and orders suggest a slowdown but growth remains strong. Domestic market orders outpace export orders, but both are showing signs of slowing and employment growth remains stable, while investment is still positive but scaling back slightly.

The manufacturing output growth forecast for 2021 is at 6.9 per cent and is expected to drop to 3.3 per cent for 2022.

A similar picture exists for export prices where the balance rose from +43 per cent to +51 per cent and is expected to remain at that level in the next quarter. By contrast, the balance in Q4 2019 was -7 per cent showing that just two years ago more manufacturers were cutting prices on exports than raising them.

According to Make UK, anecdotal evidence from companies suggests that price rises of around 10 per cent are a regular occurrence and are passing by without a response from customers, suggesting such inflation is becoming built-in.

“While manufacturers will be able to enjoy some festive cheer this year, their spirits will be tempered by the eye watering impact of escalating cost pressures which are leading an increasing number to pass these on to the consumer. Given the global nature of some of these pressures there is little sign that they will abate anytime soon,” James Brougham, senior economist at Make UK, said.

“However, they will hope as we enter a fresh year that these will gradually unwind, with the compensation being that demand prospects among their major markets continue to look strong.”

According to the survey, the balance on output fell slightly to +35 per cent from +42 per cent in Q3. Looking forward to the first quarter of 2022, output is expected to contract slightly to +30 per cent but these balances remain very high by historical standards. In the equivalent quarter in 2019, the last full one before the pandemic, the output balance was at a far lower +11 per cent.

Total orders also fell to +43 per cent from +49 per cent, however growth is set to continue in the first quarter of 2022 with a forecasted balance of +33 per cent. As with output these balances are very high historically, with the equivalent balance in Q4 2019 at just +1 per cent.

Richard Austin of BDO said orders and output are still very positive compared to historical figures, but costs pressures – input prices, labour, logistics and inflation – are settling in for the long haul.

“Investment levels, while stable, remain subdued despite good government policy in the shape of the super deduction tax and an extension to the Annual Investment Allowance. It’s a balancing act for manufacturers and we’re starting to see the impact of that in the form of more conservative expectations as we enter 2022,” he said.

Recruitment intentions remain stable at +22 per cent from +23 per cent although growth in hiring is expected to accelerate in the first quarter of next year to +30 per cent. Investment intentions, while remaining strong historically, fell sharply from +37 per cent in Q3 to +22 per cent. This could indicate a fall-off from the initial spur provided by the super-deduction tax in the spring while the extension of investment allowances in the autumn statement appears to have had little impact.