The UK manufacturing sector remained mired in contraction during August, with weak demand, tariff uncertainties and subdued client confidence weighing heavily on performance.
The latest data from the S&P Global UK Manufacturing Purchasing Managers’ Index™ (PMI®) signalled a sharper fall in new orders and export business, underscoring the fragile state of the industry.
The seasonally adjusted PMI slipped to 47.0 in August, down from 48.0 in July and below the neutral 50.0 threshold for the eleventh consecutive month. The reading highlighted the longest downturn in production volumes for a decade, now stretching to ten months.
Although production volumes displayed a degree of resilience, the overall contraction in output was marginally steeper than in July. Consumer and investment goods producers reported modest declines, while intermediate goods manufacturers managed a second month of marginal growth. The real drag came from new business. New orders contracted at the fastest pace in four months, driven by weakened client confidence, rising labour costs and tariff concerns. The fall was broad-based across consumer, intermediate and investment goods industries.
Meanwhile, in the Eurozone…
In August, the Eurozone witnessed its sharpest rise in factory output since March 2022, alongside a first monthly rise in new orders in almost three-and-a-half years, which pushed the HCOB Eurozone Manufacturing PMI to 50.7 – a 41-month high.
The main bulk of the euro area registered expansionary Manufacturing PMI readings midway through the third quarter. The exceptions were Austria and Germany, although the largest economy of the bloc posted a 38-month high and signalled broadly stable factory operating conditions
Export orders contracted for the 43rd consecutive month, with intermediate goods hit hardest, suffering their steepest drop in two years. Investment goods producers also saw marked declines, while consumer goods firms reported milder reductions. Businesses cited ongoing cost caution, international uncertainty and reduced competitiveness as key factors.
Difficult conditions fed through to the labour market. Manufacturers cut jobs for the tenth straight month, citing weaker order books and escalating wage and tax burdens. Purchasing activity and inventories were also pared back. Supply chain disruptions persisted, with vendor lead times lengthening due to shipping delays, rerouted transport away from the Red Sea, supplier capacity issues and global material shortages.
Input cost inflation accelerated to its highest level since May. A wide range of raw materials rose in price, often attributed to supplier hikes, government policy changes and higher employer national insurance contributions. Some of these costs were passed on to customers through increased selling prices.
Despite the prevailing weakness, business confidence edged up to a six-month high, though it remained below its long-run average. Optimists pinned hopes on expansion plans, product launches and stabilising global conditions. Pessimists, however, pointed to taxation risks, rising energy costs and policy uncertainty as constraints on future competitiveness. With demand continuing to falter and costs mounting, the sector faces a challenging path forward — one where cautious optimism is tempered by persistent structural and external headwinds.
Rob Dobson, Director at S&P Global Market Intelligence, said: “Production volumes are still showing resilience in the face of global geopolitical uncertainty and US tariff policies, with both July and August having seen only slight contractions that were milder than those suffered earlier in the year. Business confidence has also lifted to a sixmonth high, reflecting hopes that the trading environment is starting to settle down.
“However, August also saw a steep drop in UK manufacturers’ new orders, with total order books and overseas demand both falling at some of the fastest rates seen over the past two years. Weak market conditions, US tariffs and downbeat client confidence all contributed to the dearth of new contract wins. Job cuts were also reported for a tenth successive month, with factory headcounts dropping to one of the greatest extents postpandemic.
“The outlook for the sector therefore clearly remains very uncertain. With manufacturers fearing that possible government policy decisions, including potential tax increases, could further hurt their competitiveness in domestic and export markets, the upcoming Budget will likely prove very important in guiding business confidence about the year ahead.”
Industry comments…
Boudewijn Driedonks, partner at McKinsey & Company, said: “August’s burst of growth has the ring of déjà vu, echoing 2024’s fragile rebound.
“The faster pace of growth seen in the Eurozone and UK in August is positive, but the veneer of long-term growth momentum remains thin. Achieving that is less straight-forward, particularly as economic sentiment has just slipped in Europe and political uncertainty in France and Norway is adding fresh instability.
“The services sector in the UK, which makes up about 73% of UK GDP, powered growth in August, fuelled by brighter business sentiment and its immunity from tariffs. But, with UK manufacturing dropping further under the 50.0 growth threshold, there is no sign of improving competitiveness in the goods export industry. To achieve long-term growth, the UK will need to consider how it boosts its competitiveness – with AI, new trade deals and defence providing new opportunities.
“Europe paints the polar opposite picture. Its growth was driven by manufacturing. It rose above the growth threshold to 50.7, from 49.8 in July, driven by better-than-expected performance from Germany. Its service sector, whilst not in decline, did see a slower pace of growth. Sentiment however is waning, pointing to the fragility of the newfound ground.
“Moving into September, business growth will need to head off a volatile mix of political uncertainty and declining economic sentiment. Business leaders will need to be proactive to maintain the momentum we’ve seen in August.”
Cara Haffey, Leader of Industry for Industrials and Services at PwC UK, said: “The manufacturing sector continues to grapple with a tough environment, driven by tariff uncertainty and weak market conditions which have resulted in dampened demand both at home and overseas.
“Encouragingly, production volumes remain resilient. Though we saw a downturn in output, the rate was marginal. To maintain this momentum, manufacturers will be keen for new work intakes to recover, as this was cited as a key reason for the weakness in the sector.
“All in all, this month is a very mixed bag. Naturally, the sector is reflecting and responding to the significant challenges it is facing. Transformation and innovation continue to be essential to navigating the windy road ahead.”
Mike Thornton, Head of Industrials at RSM UK, said: “The latest fall in the manufacturing PMI reversed a three-month upward trend with a sharp fall in new orders dragging down the headline figure. We tend to see a slight drop off in new orders seasonally as the summer holidays hit, but the fall this year was sharper than previous years. Hopefully it’s a seasonal blip and we will see further signs of a recovery later in the year.
“Input prices also jumped from 57.0 to 57.7 and output prices fell from 55.6 to 53.7 showing that manufacturers are currently absorbing extra costs rather than passing this on through higher prices. When you factor in higher input prices with mounting cost pressures from energy prices and employment costs then the squeeze on margins could be a toxic combination.
“With multiple headwinds impacting the industry, manufacturers will be looking ahead to the Autumn Budget to provide some further stimulus following the launch of the long-awaited Industrial Strategy earlier in the year. No additional cost pressures for manufacturers would seem and imperative.”
Chris Barlow, head of manufacturing at MHA, said: “Manufacturing PMI has fallen back to 47 and it remains firmly in contraction territory below 50. This isn’t surprising, given the scale of the challenges UK manufacturers are currently facing despite some modest signs of optimism over the summer.
“Just as manufacturers thought the threat of tariffs had eased, last week’s announcement of new U.S. tariffs on more than 400 categories of British goods delivered another blow to the struggling sector. Finding growth has now become an even bigger challenge as costs continue to rise and exporting goods becomes more difficult.
“On top of that, there are concerns that the upcoming Autumn Budget will further hit the sector, which is still reeling from the April increases to employers’ National Insurance contributions and the minimum wage. While these costs are now baked into cashflow forecasts, our clients are telling us it is still putting the brakes on substantive, long term investment.
“Manufacturers are hoping (perhaps naively) that the government will provide more support in this October’s budget through incentives like expanded R&D tax credits, capital allowances, and a more competitive corporation tax rate. What they simply can’t afford are any more tax hikes.”
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