UK Economy Faces Recession Fears as Manufacturing Sector Shrinks by 4%

UK Economy Faces Recession Fears as Manufacturing Sector Shrinks by 4%

Rising borrowing rates and labour shortages have resulted in the country’s manufacturing industry shrinking by 4.4% this year. As the UK is fighting historically high levels of inflation, several lobby groups are pressuring the government to bring in necessary reforms to encourage growth in the sector.

According to a report by British manufacturers association ‘Make UK’, the country’s manufacturing industry has shrunk by 4% this year, raising fears regarding the state of the economy. The organisation’s latest outlook report based on a survey conducted with accountancy firm BDO LLP showed a contraction of 4.4% for this year while forecasting the sector to decline by a further 3.2% in 2023.

The study pointed out several contributing factors to the slowdown, which includes: increasing raw material costs, lower consumer demand, shortage of labour and higher borrowing costs due to interest rate hikes by the central bank. The survey showed that the percentage of new investments in the manufacturing sector has gone “negative” for the first time in two years.

“There is simply no sugar-coating the outlook for next year and possibly beyond. These are remarkably challenging times which are testing even the best and most successful of companies to the limit,” said Stephen Phipson, CEO of Make UK.

Although the drop rate for this year is much stronger compared to 2021 when the economy was bouncing back from the effects of pandemic-induced lockdowns, the manufacturing sector is still expected to be 7% smaller by the end of next year. Make UK has been consistently revising down its growth forecast for 2022 which has gone from 3% in March to 0.6% in September and now -4.4%, highlighting how bad the economy has been since 2020. The BoE raising interest rates has not helped matters either.

UK Economy Faces Recession Fears as Manufacturing Sector Shrinks by 4%

“The UK risks sleepwalking into an acceptance that little or no growth is the norm. Government needs to work with industry as a matter of urgency to deliver a long-term industrial strategy that has growth at national and regional levels at its heart.” added Phipson.

Make UK has called on Prime Minister Rishi Sunak’s government to ease its migration rules to address the labour shortage, expand tax-exemption for work-related training and boost commercial tax breaks to encourage investments in the manufacturing sector.

The lobby group’s report will be considered by the Bank of England when its nine member Monetary Policy Committee (MPC) will meet on Thursday to make a decision regarding hiking interest rates on the pound. Economists and financial markets are expecting the central bank to raise its rates by another 50 basis points to reach 3.5% – the biggest hike in over 30 years. This decision will not only increase the cost of borrowing for businesses, but also the amount that mortgage holders will have to pay back on their loans to banks.

The UK is currently facing its highest inflation in over 40-years, which crossed over 11% in October. Earlier this month, the Confederation of British Industry (CBI) forecasted that inflation has peaked at its current rate and is expected to drop to an average of 6.7% in 2023, but the economy will shrink by 0.4%. Last month, the BoE declared Britain was in a recession and that further interest rate hikes will be necessary to curb the rising costs of living for Britons.

On Monday, the Office for National Statistics (ONS) will publish its gross domestic product (GDP) figure for the month of October. The country’s GDP had fallen by 0.2% in the third quarter of 2022 as households and businesses struggled with soaring inflation, the likes of which they’ve never seen before.

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