Manufacturing orders slump as cost pressures squeeze investment

UK manufacturers are facing mounting pressure from falling orders, rising costs and weakening confidence, according to the latest CBI Industrial Trends Survey, with businesses cutting investment plans and preparing for further job losses.

The quarterly survey found manufacturing output fell again in the three months to July, extending a period of stagnant or declining production that has persisted since mid-2024. At the same time, total new orders declined at the fastest pace in six years, reflecting weaker demand in both domestic and export markets.

The downturn was broad-based, with 13 of 17 manufacturing sub-sectors reporting lower output. The sharpest declines came in food, drink and tobacco, paper, printing and media, and metal products, while only the aerospace and motor vehicles and transport equipment sectors recorded growth.

Manufacturers expect conditions to remain challenging over the coming months, with output and order books both forecast to deteriorate further through to October.

Business confidence also weakened during July, with optimism about both the overall business environment and export prospects continuing to decline.

The survey found that 70% of manufacturers identified weak orders or sales as the main factor likely to constrain production over the next three months, above the long-term average. Although supply chain disruption eased slightly, concerns over materials and component availability remained elevated.

Cost pressures continued to intensify, with average unit costs increasing at their fastest rate since late 2022. While businesses responded by raising domestic and export prices, increases failed to keep pace with rising costs, leaving many manufacturers facing tighter profit margins.

Reflecting these pressures, investment intentions weakened across every major category. Businesses expect to reduce spending on buildings, plant and machinery, product innovation and staff training over the next year, with uncertainty over demand, inadequate returns and limited internal finance cited as the biggest barriers.

Employment also remained under pressure, with manufacturers reporting lower headcounts during the quarter and expecting further reductions over the next three months.

Ben Jones, Senior Lead Economist at the CBI, said: “We’re seeing manufacturers being squeezed from both sides.

“Costs continue to climb while weak demand limits their ability to raise prices – leaving firms to absorb the pressure through shrinking margins, weaker investment and further cuts to employment.

“If the new administration is serious about reindustrialising Britain, restoring industrial competitiveness must be one of its first priorities. Cutting industrial electricity costs – which remain around 45% above the G7 median – would give manufacturers greater confidence to invest, expand and create jobs.”

Responding to the survey, John Phillipou, Managing Director of SME Lending at FTSE 250-listed Paragon Bank, said the findings reflected what the lender was hearing from its own customer base.

“CBI’s findings align with our experiences talking to our manufacturing customers across the UK,” he said. “Many firms are telling us that while they maintain their ambitions to grow, falling orders, rising employment costs, skills shortages and uncertainty around energy prices are making it harder to commit to investment decisions.

“A decline in orders reduces visibility over future workloads, while weaker confidence inevitably impacts decisions around recruitment, expansion and capital expenditure. This should raise alarm bells for policymakers because investment is critical to improving the nation’s productivity, competitiveness and long-term growth.”

Phillipou said that despite the difficult backdrop, many SMEs remained focused on growth opportunities.

“Despite these challenges, we know the UK has an SME sector to be proud of. We are a nation of entrepreneurs, innovators and problem-solvers, and time and again British businesses have shown their ability to adapt, invest and lead. Working with more than 17,000 SMEs nationwide, we continue to see firms looking for opportunities to grow.

“Manufacturers such as Datum Tool Design prove what investment can unlock. The Northern Ireland business secured £1.6 million of funding from Paragon to invest in the country’s largest CNC machining centre, increasing capacity and supporting future growth. This is only possible when companies have the confidence to invest.”

He added: “As Andy Burnham’s new Government develops its economic agenda, SMEs must be placed at the heart of its growth strategy. If the ambition is to deliver meaningful devolution and growth in every postcode, it is local businesses with local knowledge that will be best placed to turn that vision into reality. With more supportive conditions, Britain’s SMEs will be empowered to find opportunities, solve problems and ultimately drive economic growth.”

The survey suggests manufacturers are entering the second half of 2026 under increasing strain, with weakening demand, rising operating costs and reduced investment appetite continuing to weigh on the sector despite pockets of resilience.