Cost confidence and competitiveness 6 months on
Released On 18th Jul 2023
10.07.23
Earlier this year, Make UK, in partnership with PwC published it’s 2023 Executive Survey looking at the risks and opportunities for UK manufacturers in 2023. It was clear that it was going to be a challenging year for UK manufacturers with ongoing supply chain disruption, access to labour and high transport costs adding to a growing sense of economic and political uncertainty in the UK's main markets.
It was critical therefore that in 2023 we saw costs reduce, confidence boosted, and competitiveness increased. Six months on we explore whether that has been the case or whether the dial has in fact swung the opposite way.
Reducing costs
High energy prices, soaring input costs and wage inflation were just some of the costs companies cited at the start of the year. There was a real nervousness that the end of the Energy Bill Relief Scheme (EBRS) would paint a gloomy picture for manufacturers, who were continuing to battle rocketing energy costs. The scheme’s successor – the Energy Bills Discount Scheme (EBDS) involved a more targeted scheme with a reduction in support overall. While the wholesale electricity price is now approximately £95/MWh as opposed to the highs of £511/MWh seen in August 2022, risks, and more importantly volatility remains, so it’s critical manufacturers stay vigilant and continue to take steps to reduce consumption, increase security of supply and therefore reduce their exposure to this volatility. And let’s not forget we are in the summer period and as the winter draws near these costs will undoubtedly creep up again. But it’s not just energy prices that have led to the cost creeps, the big issue since publishing our report is business rates re-evaluations which are based on rental values between 2015 and 2021, the first business rates revaluation since 2017. This means manufacturers are likely to have faced a business rate hike, and if they have scaled up and expanded their business then they would definitely be seeing a hike.
But it’s not all bad news, the Government has heard Make UK’s calls and responded by extending the business rates relief for investment in green plant and technology from one year, up to 2035, which is a major win for industry.
When it comes to wage inflation, the acute labour shortage means that holding onto talent comes at a price and with the cost of living high on employees’ concerns, the need to pay staff a competitive rate, means pay settlements continue to stand at 6%. This combined, with a National Living Wage increase of around 10% means that wage inflation has continued and looks like it won’t be abating any time soon.
Boosting confidence
The worrying trend of our 2023 Executive Survey was UK manufacturers no longer seeing the UK as a competitive place to do business, a stat that worsened when asked about whether it was attractive to foreign investors. But 6 months on do we see any signs that confidence is picking up?
Our latest Manufacturing Outlook survey data suggests that maybe that is the case, with consistency observed in output and orders performance over the last two quarters translating into improved business confidence and improved UK economy confidence. While the scale of growth in confidence metric is limited, it’s the consistency of its positivity that signals a possible end to the daily firefights businesses have had to endure over the past few years.
Confidence could continue to pick up as we see the Government really get behind Advanced Manufacturing which the Chancellor has identified as one of his strategic growth sectors. If we park the question mark about what is defined as ‘Advanced’ the fact that the Government firmly has its eyes on Manufacturing as a lever for growth can only be a positive.
The highly anticipated Manufacturing Moment is due shortly and if we see policy levers that support growth in the sector that could be the golden ticket to truly boosting confidence and manufacturing investment sentiments could return to their pre-pandemic level, which was twice as strong as current sentiments.
Increasing competitiveness
We are currently the 9th manufacturing nation in the world. A position in the top ten sounds good but how do you make it to number one which is currently China?
You need to increase your competitiveness and ensure that the UK is the optimal place to do manufacturing and that we are competing on the global stage. We know that confidence is building but is this increasing our overall competitiveness?
Firstly, we cannot ignore the huge announcements that our overseas competitors have made, namely in the US with the Inflation Reduction Act (IRAct). While there are some teething issues around this, such as bureaucracy of funding and a lack of people and skills to support expansion efforts, it is clear that the IRAct is driving investment to the US.
The approximately $370bn investment from the IRAct represents 1.5% of US GDP, if we were to match this on a level then it would cost approximately £33bn of Government spending. Whilst this is a hefty sum, it falls far below what we spent on Covid-19 measures (estimated to have cost between £310bn and £410bn).
Similar commitments to both domestic investment and production have been made by the UK manufacturing sector’s largest trading partner, the EU Net Zero Industry Act (EUNZIA) in almost direct response to the US’ IRAct. Nevertheless, the scale of ambition, as measured by the money set aside to fund it, is far smaller than that of the US, with a tighter scope focussing on developing what it has identified as the 5 key net-zero technology sectors of wind, solar PV, heat pumps, battery cells and electrolysers.
If we are to increase competitiveness, we believe there is just one thing for the UK Government to do – a modern, ambitious Industrial Strategy. The UK is the only nation without one. If we want to increase competitiveness, we need to start with a plan.
