The UK manufacturing sector showed tentative signs of stabilisation in July, but the underlying picture remains fragile as demand softens and cost pressures mount.
Manufacturing output was broadly flat in the three months to July, according to the latest CBI Industrial Trends Survey. Although declines were recorded across a wide range of sub-sectors, these were largely offset by stronger activity in the motor vehicles & transport equipment and food, drink & tobacco sectors. However, manufacturers expect output to fall slightly over the coming quarter to October.
Demand conditions continued to weaken. Total new orders fell during the past quarter, primarily due to a drop in domestic orders, while export orders remained unchanged. Looking ahead, firms anticipate declines in both domestic and overseas orders through to October.
Exporters, in particular, are grappling with growing headwinds. More than half of manufacturers—56%—cited pricing as a key constraint on exports, up significantly from 38% in April. This likely reflects a combination of higher US tariffs and the appreciation of Sterling against the US dollar. In addition, one in five firms reported that quotas and licensing issues are limiting export potential, a level rarely seen since the 1980s.
Cost pressures intensified further. The growth in average costs accelerated for the third consecutive quarter, reaching the fastest pace since January 2023. While both domestic and export prices rose, they failed to keep up with rising unit costs, pointing to a continued squeeze on manufacturers’ profitability. Firms expect domestic prices to rise at an above-average pace over the next three months, while export prices are anticipated to remain flat.
Business sentiment has continued to decline. Optimism among manufacturers deteriorated again in July, with little sign of recovery in investment appetite. Spending plans for the year ahead remain weak across the board, including in buildings, plant & machinery, training & retraining and product & process innovation. Firms highlighted that investment is being held back by uncertainty around future demand, inadequate returns, and persistent labour shortages.
The jobs outlook also remains subdued. Manufacturing employment fell for the third quarter in a row and is expected to decline slightly further in the three months to October. Shortages of skilled labour remain a pressing issue, with more than one quarter of firms citing this as a constraint on output in the next three months.
Ben Jones, lead economist, CBI, said: “Conditions in UK manufacturing remain challenging, with many firms reporting subdued and unpredictable demand. High input costs, labour shortages and global supply chain disruptions are continuing to put pressure on margins and capacity.
“Rising labour costs have undermined manufacturers’ external competitiveness. While some exporters are finding opportunities overseas, overall sentiment is cautious, with economic and policy uncertainty weighing heavily on investment decisions.
“What manufacturers really need now is stability—starting with predictability in the tax environment, alongside delivery at pace on the government’s industrial strategy, skills reforms and steps to bring down energy costs. As we look ahead to the Autumn Budget, government must work to reassure businesses to avoid additional uncertainty that could further weaken investment prospects.”
