A year on from record-breaking lows in the UK manufacturing sector – the worst results since the Make UK and BDO Manufacturing Outlook began – all the key performance indicators are firmly pointing in the right direction.
Confidence is at its highest level since the metric was introduced in 2014, at a UK average of 7.2 points; growth has continued, despite still being below pre-pandemic levels; output growth is forecast to outpace the economy overall, while investment and employment sentiment is also up.
The sector is not without its challenges – let’s be very clear. But the resilience the market has shown to adjust and rebuild in the face of real adversity has resulted in performance outpacing expectation for the first half of the year – fuelled by orders and demand.
While UK manufacturing as a whole is extremely positive, when you drill down into the regions the picture is varied. On the one hand, you have the West Midlands which is mirroring national trends. Output, employment, and investment are all up, with confidence levels matching the UK average. On the other, the East Midlands has seen a slight fall in business confidence since the first quarter, despite remaining well within positive territory. The fall in confidence in the East Midlands is reflective of the performance of the industry in the region which reported slightly worse, but still strong, results compared to Q1. The only metric still negative for the East Midlands is employment, at -7% balance for Q2.
The East Midlands is the only UK region to show a decrease across the board. But, with soaring confidence elsewhere, what are the reasons for the disparity between the East and West?
One of the main reasons is due to the difference in sectorial composition between the two regions – the East Midlands’ largest sub-sector is food and drink, while the West Midlands relies heavily on transport equipment. In the case of output growth, the latest statistics indicate that growth in the West Midlands outpaced that of the East Midlands in Q2 2021 due to the automotive sector making a rapid comeback, after a significant loss in output over 2020. Food and drink did not suffer to the same degree, in terms of lost output in 2020 so, as such, its ‘rubber-band’ effect on the recovery side is less pronounced.
Despite renewed optimism overall, manufacturing still faces ongoing and emerging challenges around supply chain delays, shortages in key materials, rising inflation and logistical costs. The sector’s ability to adjust, rebuild and demonstrate resilience will hold them in good stead as they navigate the next six to 12 months. But while many businesses have overcome the initial hurdles placed in front of them by Trade Cooperation Agreement (TCA) – resulting in a 40% drop in exports to the EU in January – challenges will remain. So too will the additional pressures of UK and overseas COVID regulations and the continued disruption being felt in the supply chain.
As the market tries to circumnavigate the strains being felt downstream, effecting delivery lead times, container shipping costs, and demand outstripping supply, manufacturers will continue to take each quarter one step at a time – this time in the knowledge that the lessons learned in the last 12 months will make them more determined and adaptable than ever.
If you’d like to discuss the regional manufacturing outlook further, or you’d like to find out how BDO can help your business develop its own recovery plan, simply contact me on Jon Gilpin or call (0) 7970 115322.