Decline in Confidence in the UK Manufacturing Sector: Reform Plans Under Scrutiny

The recent budget speech by Finance Minister Rachel Reeves has pushed confidence in the British economy among manufacturers to a new low. A survey by the industry association Make UK and the consulting firm BDO revealed that the confidence index for the fourth quarter fell from 6.8 to 5.8. This marks the sharpest decline since the onset of the Covid-19 pandemic. According to Make UK, the budget abruptly ended the previously positive trends in the UK manufacturing industry. The index assesses perceptions of economic conditions for the coming year on a scale of 1 to 10. "After manufacturers struggled with rising costs throughout the year, they are now facing a full-fledged cost shock that has severely undermined their confidence," explains Fhaheen Khan, senior economist at Make UK. Particularly, the significant increase in social security contributions is seen as a potential turning point for some companies. Make UK is now forecasting a decline in UK manufacturing output by 0.2 percent for 2024, after previously expecting growth of 0.5 percent. For 2025, a rise of 0.7 percent is forecasted. This is despite positive reports regarding production, orders, and recruitment intentions from a survey conducted in November among more than 300 companies. The economic data released on Monday confirm the declining business morale following the £25 billion increase in social security contributions by the Labour government. At the same time, the British economy appears to be slowing down. Finance Minister Reeves suffered a setback last week when official figures showed a decline in GDP by 0.1 percent in October. The slight growth of 0.1 percent in the third quarter increases the pressure on the Bank of England ahead of its monetary policy announcement on Thursday. Current market expectations assume an unchanged interest rate of 4.75 percent, after it was lowered in November and August. While other central banks like the Bank of Canada and the European Central Bank have already moved to interest rate cuts, the situation in the UK remains complex. Economists predict an increase in service inflation to 5.1 percent in November, exacerbating the challenges for the Bank of England, which has to navigate between economic slowdown and persistent price increases.