Green shoots of recovery for UK manufacturers

December saw further signs of growth emanating from the UK manufacturing sector. Output rose for the third successive month and new orders increased for the first time since September 2024. Furthermore, there were also signs of the trends in new export orders and employment moving closer to stabilising after sustained downturns. The seasonally adjusted S&P Global UK Manufacturing Purchasing Managers’ Index (PMI) rose to 50.6 in December, from 50.2 in November, its highest level for 15 months but below the earlier flash estimate of 51.2. The PMI has posted above its neutral 50.0 mark (separating growth from decline) in each of the past two months.

Three of the PMI sub-components registered readings consistent with improved operating conditions in December, as output and new orders both rose, and suppliers’ delivery times lengthened. Although stocks of purchases and employment both declined, this was to lesser extents than in November. The latest increase in manufacturing production mainly reflected a building-up of stocks of finished products and efforts to clear backlogs of work. UK manufacturers also benefitted from several reduced headwinds towards the end of the year, as the negative impacts of uncertainty surrounding the Autumn Budget, tariffs and the JLR cyber-attack all moderated.

Output rose across the consumer, intermediate and investment goods sectors, the first time concurrent growth has been registered since August 2024. Data broken down by company size definitions were less suggestive of broad-based expansion, however. Growth was heavily skewed towards large manufacturers, as both small- and medium-sized companies registered downturns (an identical pattern was also seen for new orders). A slight gain in new work intakes also contributed to the expansion of production volumes. Incoming new business rose for the first time in 15 months. Inflows improved at consumer goods manufacturers, stabilised in the intermediate goods category, but fell at investment goods producers.

The domestic market was the main growth spur for new orders, as intakes of new work from overseas contracted for the 47th successive month in December. That said, the rate of decline in new export business was only mild and one of the weakest during that sequence. UK manufacturers saw signs of recovery in demand from the USA, APAC and Middle East regions.

Although manufacturing employment decreased for the 14th month running in December, the rate of job loss was the weakest during that sequence of decline. Where a reduction in staff head counts was reported, this was linked to redundancies, non-replacement of leavers, hiring freezes and efforts to control costs. There remained evidence of excess capacity at UK factories despite the latest round of job cuts, however, as backlogs of work contracted for the fortyfourth successive month (albeit at a much slower pace than in November).

Cost increases
December saw a mild increase in price pressures, as input cost inflation accelerated and output charges rose after declining in November. Average purchasing costs have risen throughout the past two years, with December seeing manufacturers again report a wide range of inputs as up in price (including electronics, energy, metals and packaging components). Some also noted that suppliers were passing on higher costs, particularly those related to payroll taxes. Small- and medium-size producers were hit harder by cost increases than large manufacturers (the latter saw the weakest rise in purchase prices overall).

After falling for the first time in over two years in November, factory gate prices resumed their upwards trend in December. Business confidence about the year ahead outlook dipped from November’s nine-month high in December. Manufacturers reported they remain concerned about high costs, increased taxation, reduced international competitiveness, geopolitical uncertainty and the possible impact of Government policy.

Rob Dobson, a director at S&P Global Market Intelligence, said: “Further signs of growth emanated from the UK manufacturing sector before the turn of the year. Output rose for the third successive month and new order intakes improved, albeit slightly, for the first time since September 2024. The domestic market remained a positive spur to growth while new export business, despite having now fallen for almost four consecutive years, took a sizeable stride towards stabilising. UK manufacturers benefitted from several reduced headwinds towards the end of the year, as the negative impacts of the uncertainty surrounding the Autumn Budget, tariffs and the JLR cyber-attack all moderated.

“The start of 2026 will show if growth can be sustained after these temporary boosts subside. The base of the expansion needs to shift more towards rising demand and away from inventory building and backlog clearance. Last month’s interest rate cut will hopefully play some part in assisting this transition, encouraging manufacturers and their customers to increase spending and investment. Manufacturers remain uncertain on this score, with business optimism falling for the first time in three months in December.”

Significant uptick in demand
Chris Barlow, head of manufacturing at accountants MHA, commented: “The final manufacturing PMI for December on the back of an increase in November confirmed that at long last the UK manufacturing sector can look forward to 2026 with modest, albeit patchy, confidence. Although the financial pressures remain, namely on rising wage bills and fuel costs, this has finally been outweighed by a significant uptick in demand particularly from the UK.

“Government measures, such as the confirmed increase to the minimum wage, alongside the impact of the salary sacrifice cap, are making businesses cautious about hiring new staff. Where the Government could help in 2026 is by focusing their energy on clear political support for an Industrial Strategy, given the sector needs support to tackle issues like skills, productivity, and competitiveness, and to encourage growth and investment for the future.”

He concluded: “The need to maintain that improvement in UK demand is vital for manufacturing’s prospects in 2026 given the path ahead for global trade is not expected to get any easier. Manufacturers face ongoing pressure from tariffs and complex trade challenges, particularly concerning critical relationships with the EU and US. This persistent geopolitical uncertainty and risk will encourage many businesses to reconfigure their supply chains with more near-shoring or reshoring of production capacity.”