“It’s been a tough year for some manufacturers, many of whom are still facing weak demand, particularly from export markets including the US, the Middle East and Europe.  Although inflationary pressures and supply chain disruptions are less of an issue than they have been, the end of 2024 has seen a mild increase in costs of chemicals, energy, food products, metals, paper and timber, with the Red Sea crisis still contributing to price pressures. 

“Despite these challenges, manufacturers remain optimistic about 2025, with more than half of manufacturers expecting production to rise over the coming year, according to November’s Manufacturing PMI survey. This is driven by planned expansions and diversification, product launches, hopes for economic recovery and efforts to revive export demand. 

“The recent UK Budget enables stable R&D tax relief and the continuation of full capital expensing, with rates of Corporation Tax remaining unchanged, providing a more stable backdrop for investment decisions, whereby a forward-looking technology strategy is key to gaining and retaining competitive advantage.

“Skills England has been formed to ensure the workforce is equipped with the skills needed to power economic growth, bringing together Mayoral Combined Authorities and other key local partners, businesses, training providers and unions to collaborate and work on what has been a long-standing issue for the sector, particularly with the rise of digital transformation. Fostering a culture of innovation and learning could provide employees with the ability to develop new skills and capabilities and therefore act as a great retention strategy, too.

“While increases in employers’ National Insurance Contributions and the National Living Wage, may add pressures, these changes are also likely to focus attention on increased productivity and potentially fuel investment into digitalisation and automation, enabled by extended capital allowances.  The UK’s robotic density is currently the lowest of the G7 countries, which has an impact on manufacturer’s margins and scope for innovation.

“Targeted energy support covered in the Budget will also create opportunities for decarbonisation. Being proactive in sustainability serves as a signal of business strength and establishes leadership. Conversely, lacking a sustainability strategy and neglecting opportunities may make it more difficult to attract and retain skilled labour, access capital, or reach end markets. Sustainability is therefore becoming more intrinsically linked to a business’s success.

“The recent Industrial Strategy Green Paper sets out the governments’ vision, centred around proving certainty and stability for businesses to invest in the UKs high-growth sectors.  The focus is on the UK’s unique strengths and world-leading industries including advanced manufacturing and clean energy, where there is the opportunity to adapt and grow and lead on a global basis.  This will undoubtedly create new supply chains and high-margin opportunities for many manufacturers who already supply into these sectors or who are able to pivot and diversify into them.  The focus on regional growth is welcome for all manufacturing sub-sectors, as is the drive for economic security and resilience, reducing supply chain vulnerabilities. 

“Supply chain management has been challenging in recent years, exacerbated by the global pandemic and geopolitical conflicts. Manufacturers are simplifying supply chains and reducing dependency on specific countries through near-shoring, friend-shoring, and onshoring, which again presents significant opportunity for many UK businesses. Building closer supplier relationships through sustainability can be a strategic move, especially with increasing regulation on Scope 3 emissions reporting and the introduction of EU Carbon Border Adjusted Mechanism.

“The manufacturing sector may want to brace for 2025 as it’s likely to bring some volatility, especially in the wake of geopolitical events and likely tariffs from the US, which will not only impact UK exports, but could also disrupt global supply chains.  But this may also create opportunities for re-shoring as well as new export markets, whereby it is hoped that the final Industrial Strategy including sector plans, due to be published Spring 2025, will help many UK manufacturers harness these.” 

Laura Capper, Head of Manufacturing and Construction at NatWest comment

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