UK manufacturers continued to face rising constraints caused by supply chain issues during August. Shortages of inputs and delivery delays disrupted production schedules, leading to slower output growth, and also resulted in marked increases in input prices. Companies nonetheless still achieved solid gains in output, new orders and employment.

Manufacturing output rose again in August, albeit to the weakest extent since February. Growth eased particularly sharply at intermediate goods producers. Companies linked higher output to new order gains and the ongoing process of re-opening global economies. Incoming new business rose in August, reflecting increased inflows from both domestic and overseas markets. On the export front, manufacturers reported increased orders from clients in Europe, China, the US, Asia and South America.

The outlook for the UK manufacturing sector also remained bright in August. Almost 66% of companies indicated that they expect output to rise over the coming year, compared to only 4% forecasting a decline. Confidence rose to a three-month high, reflecting expectations of continued economic revival, stronger global demand, investment plans and hopes that current supply issues would either lessen or even be fully resolved.

However, price inflationary pressures continued to build in the UK manufacturing sector in August. Average purchase prices rose at the fourth-fastest rate in the survey history, beaten only by the cost increases seen during May, June and July. A wide range of items were reported as up in price, as shortages and delivery issues left rising demand chasing reduced supply.

Supplier issues also dogged the sector, with average supplier lead times lengthened to the second-greatest extent in the survey history during August. The only time when delivery delays have been more pronounced was in April 2020 during the first COVID-19 lockdown. Input shortages, shipping delays, a lack of port capacity, transportation issues, Brexit and shortages of logistic industry staff all contributed to delivery delays.

Industry comment

Huw Howells, head of manufacturing and industrials at Lloyds Bank: “August’s marginal dip is more of a signal that sector growth is returning to some sort of normality, rather than an alarm bell signalling that the recovery is waning. Overall, manufacturing continues to perform very well.

“Recovery is underpinned by continued new order growth while subsectors like commercial aerospace, which have been hit hard by the pandemic, are starting to demonstrate a lift in activity as airlines globally tool up to meet recovering passenger numbers.

“Where activity is being depressed compared to recent months, this is indicative of the continued materials and labour shortages that plagued the economy during August. These issues have lengthened lead times and increased costs for firms.

“The seasonally-adjusted index may, however, hide some added disruption from the post-lockdown summer. More people are taking longer holidays than they usually would, which we hear is delaying a good chunk of purchases in the sector.”

Simon Jonsson, head of industrial products at KPMG UK: "Manufacturers find themselves in uncharted territory as demand soars but materials shortages bite. The situation is manageable for now but should it persist then the run of growth the industry is on could be constrained by inflation.

“The scope for future growth has made the sector attractive for M&A activity, which is feeding through now and will continue in the coming months. We’re now seeing businesses prioritise on ESG, skills and technology as they prime themselves for investment.”

Maddie Walker, Industry X lead at Accenture: “It comes as no surprise that supply chain gridlock hampered production growth, but UK manufacturers are showing confidence they can overcome these challenges to increase output as the economy rebounds. Although volatility is expected, the last 18 months have drawn attention to inefficiencies in core operations and highlighted the importance of technology on the factory floor. Many manufacturers have already made technology investments, such as automation and 5G connectivity, to become more resilient, streamline production processes and enhance the visibility of supply chains. In addition to modern facilities, manufacturers will also need to flexibly design and develop products in order to respond to volatile markets. It’s vital manufacturers steer such change by upskilling employees and developing talent, particularly in software engineering, or risk a severe skills shortage on the horizon.”

Lee Collinson, head of manufacturing at Barclays: “The makers are raring to march but are increasingly finding themselves doing so with one arm tied behind their backs by supply chain issues. The upshot is that the zip we saw over the past few months has waned a little with higher raw material costs and longer delays impacting levels of growth in overall activity, bringing the Index down to its lowest level in five months. That said, encouragingly, optimism in the sector remains high and manufacturing, for now, will focus on controlling costs and remaining flexible in its planning whilst demonstrating the resilience the sector is renowned for.”

Chris Barlow, Partner at MHA: “Demand is encouragingly high within the manufacturing sector but there is major concern with supply chains. We are hearing stories of many unfulfilled orders as shortages of materials and workers hit the whole economy. A scarcity of freight and the Government’s refusal to allow drivers to be termed “skilled workers” to facilitate overseas recruitment is responsible for many of the logistical difficulties. In addition, the combination of global semi-conductor shortages, the 'pingdemic', tax changes and summer shutdowns is depressing output.

“If this pressure is not eased supply chain shortages will lead to inflation, which will have further negative consequences for the whole economy and for manufacturing, the sector which has been leading the way in terms of recovery. Manufacturers need to review the resilience of their supply chains as a priority and if they haven’t already started they need to begin now, as this can be a slow process.

“The worsening situation requires short-term assistance from the government far beyond their recommendations for manufacturers to shore up supply chains with workers due to come off the furlough scheme when this closes at the end of September. It’s highly unlikely these workers have the skills required or can be trained in the requisite timescale. This is part of the perennial skills shortage that has remained the main problem within manufacturing for many years. While this has proven to be a hard problem to solve, part of the answer could be increased tax incentives for companies to really invest in the retraining of workers coming off furlough at the end of September to address the stark supply chain issues and enable manufacturers to meet future demand.”