Manufacturers are currently enduring a cash and margins squeeze beyond any they have faced in the past decade, the latest Manufacturing Monitor report from Make UK has warned.
The report highlights the ‘soaring cost of doing business’ for those in the sector as firms struggle with major increases to material, energy and labour costs which have been seen since the start of the pandemic.
“While manufacturers are also raising their factory gate prices, in other words, the prices of their finished goods, at an alarming rate, it is proving to be insufficient to offset the erosion to their operating margins,” the report warns.
As a result, a planned hike in National Insurance Contributions – which is coupled with the withdrawal of Covid related Government support to the industry – comes at an “astoundingly inopportune” time for UK manufacturing.
Make UK calls on the Government to postpone the NICs rise until the economy is in a more robust position. It says the policy would “directly work against manufacturers’ efforts to secure labour” at a time of unprecedented shortage, which is leading to the industry’s inability to fulfil booming demand.
“With the strength of the industry’s order books, manufacturers are motivated to continue production at as high of a pace as possible, but the industry won’t be able to sustain output growth if heightened input prices are sustained in the long term,” it says.
Expectations among manufacturers for when the current period of cost inflation will cool have been extending throughout the pandemic.
Make UK’s latest survey figures show that 49% of firms think it will take over a year for energy prices to settle, with 23% expecting their costs not to settle for at least two years. As a result, 47% say they have adjusted business practices.
Meanwhile 54% of firms are reporting a major increase in material costs and 8% suggest that these increases represent an “existential threat” to the business. Forty three percent of businesses expect material cost inflation to take over a year to settle, with a further 15% expecting it to take at least two years.
Wage inflation is a further concern and shows no sign of cooling in the immediate future, the report says, with vacancies within the industry currently at the highest rate for at least 20 years. The manufacturing vacancy rate has grown by 91% since March 2020.
“There is a multitude of factors that are exacerbating the challenges manufacturers are facing when it comes to accessing labour, with the leading issues being: increased difficulty sourcing labour from the EU following the UK’s exit from the Bloc, an expensive labour market, changing workforce attitudes towards flexible working, and reduced hours or early retirement,” the report says.
In light of the sector’s long term challenges, Make UK said it continues to recommend that the Government’s Super Deduction policy – which offers firms a 130% first year capital allowance for qualifying plant and machinery assets – is re-announced with a significant extension, “so that industry can effectively plan investment in the medium to long term, moving it away from a short-term Covid intervention policy”.
“The industry has become increasingly cautious over the last two years of spending capital, especially given the continued input price pressures the sector is facing, and will likely continue to face, for the rest of 2022,” the report says. “Policies, such as the Super Deduction, can be reformed as a longer-term scheme to bolster investment, and subsequently confidence, beyond the immediate future.”