UK manufacturers are facing mounting pressure on cash flow and investment as orders decline and costs continue to rise according to the latest CBI Industrial Trends Survey.
The quarterly survey of 338 manufacturing firms found that output fell in the three months to July, extending the period of flat or declining production that began in mid-2024.
Total new orders declined at their fastest rate in six years, recording a weighted balance of -24%, as both domestic and export demand weakened. Manufacturers expect orders to fall again during the three months to October.
At the same time, average costs rose at their fastest pace since October 2022, with a balance of 65% of manufacturers reporting an increase.
MARGIN PRESSURE
The CBI said manufacturers’ ability to pass these costs on was becoming increasingly constrained. Domestic selling prices are expected to record their weakest growth since October 2024 during the next quarter, while export prices are forecast to fall.
The resulting pressure on margins is affecting firms’ capacity to fund investment internally. Some 26% of manufacturers identified a shortage of internal finance as a barrier to investment – the highest proportion for six years.
Investment intentions remained weak across the sector, with firms expecting to reduce spending on buildings, plant and machinery, product and process innovation, and training over the next 12 months.
Planned investment in buildings recorded a balance of -43%, compared with -38% in April, while plant and machinery also fell to -43%, from -36%.
Uncertainty about demand was identified as the principal barrier to investment by 52% of manufacturers, followed by inadequate returns at 30% and a shortage of internal finance at 26%.
OPTIMISM FALLING
Business sentiment also deteriorated, with optimism about the general business situation falling to -36% and export prospects declining to -23%.
Ben Jones, CBI senior lead economist, says: “We’re seeing manufacturers being squeezed from both sides. Costs continue to climb while weak demand limits their ability to raise prices – leaving firms to absorb the pressure through shrinking margins, weaker investment and further cuts to employment.
“If the new administration is serious about reindustrialising Britain, restoring industrial competitiveness must be one of its first priorities. Cutting industrial electricity costs – which remain around 45% above the G7 median – would give manufacturers greater confidence to invest, expand and create jobs.”
John Phillipou (main picture), managing director of Paragon SME Lending, says: “CBI’s findings align with our experiences talking to our manufacturing customers across the UK. Many firms are telling us that while they maintain their ambitions to grow, falling orders, rising employment costs, skills shortages and uncertainty around energy prices are making it harder to commit to investment decisions.
“A decline in orders reduces visibility over future workloads, while weaker confidence inevitably impacts decisions around recruitment, expansion and capital expenditure. This should raise alarm bells for policymakers because investment is critical to improving the nation’s productivity, competitiveness and long-term growth.”
“We know the UK has a SME sector to be proud of.”
But he adds: “Despite these challenges, we know the UK has a SME sector to be proud of. We are a nation of entrepreneurs, innovators and problem-solvers, and time and again British businesses have shown their ability to adapt, invest and lead. Working with more than 17,000 SMEs nationwide, we continue to see firms looking for opportunities to grow.
“Manufacturers such as Datum Tool Design prove what investment can unlock. The Northern Ireland business secured £1.6 million of funding from Paragon to invest in country’s largest CNC machining centre, increasing capacity and supporting future growth. This is only possible when companies have the confidence to invest.
“As Andy Burnham’s new Government develops its economic agenda, SMEs must be placed at the heart of its growth strategy. If the ambition is to deliver meaningful devolution and growth in every postcode, it is local businesses with local knowledge that will be best placed to turn that vision into reality.
“With more supportive conditions, Britain’s SMEs will be empowered to find opportunities, solve problems and ultimately drive economic growth.”
