UK manufacturing sector hit by 1,400 insolvencies

06 September 2022 3 min. read
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As the UK’s economy continues to flounder in the wake of historic inflation, and spiralling energy prices, insolvencies in the UK manufacturing sector have jumped by more than 60% in the last year. A new study suggests that producers of furniture and food products have been hardest hit – accounting for 200 insolvencies in the last 12 months.

Manufacturing is one of the production industries, which also include mining, electricity, water and waste management and oil and gas extraction. According to a Parliamentary research briefing from the House of Commons Library, in 2021, the manufacturing sector accounted for 9.7% of total UK economic output, and 7.3% of jobs – making its health a key economic bellwether.

The downturn faced by large swathes of manufacturers will be a grave cause for concern, among many experts, then. Record inflation in the UK – exacerbated by the Russian military’s invasion of Ukraine – has driven up the price of procuring materials and energy – while stagnant wages mean that demand for consumables has collapsed. As a result, a growing number of manufacturing firms are finding themselves in financial distress, according to new research.

UK manufacturing sector hit by 1,400 insolvencies

Professional services firm Mazars has found that the number of insolvencies in the manufacturing sector has risen by almost 63% in the last year, from 893 in 2020-21 to 1,454 in 2021-22. With business energy costs rising by an average of 250% in the first quarter of this year compared to the same quarter in 2021, there seems to be a clear link – and with energy prices slated to grow exponentially later this year (even with energy providers declaring record profits) there is clear potential for the crisis to deepen for manufacturers.

Julien Irving, Partner at Mazars noted, “The level of inflation we’re seeing at the moment can be lethal for manufacturers, especially energy costs. Many are unavoidably energy-intensive and such steep rises in energy prices can have a crippling effect on their ability to operate, especially if that cost cannot be passed on to their customers.”

At the same time, the Bank of England raised its base rate to 1.75% in August in a bid to control inflation rising interest rates. This has ended up making it harder for businesses to keep up with the spiralling costs of their debts, though. Research suggests that relatedly, 440,000 small businesses could be forced to close this year due to late payments alone. Manufacturers are no exception to this, having relied on payment deferrals to get through the lockdown months – and they are now finding those remaining debts are becoming untenable.

Some segments of the manufacturing scene have been hit harder than others, too. With the war in Ukraine having led to shortages of staples such as sunflower oil, and wheat, food producers have seen costs spike, while Brexit has made it more difficult to source workers to staff factories. Subsequently, 99 firms from the segment collapsed in the last 12 months – a rise of 62% on 2021’s levels. Meanwhile, the cost-of-living crisis has seen the majority of consumers scale back non-essential spending – leading to a collapse in demand for ‘luxury’ products like new furniture, while materials have also become more expensive. This has led to 101 furniture manufacturers becoming insolvent – a 74% spike compared to the year before.

Rebecca Dacre, Partner at Mazars, expanded, “Current economic conditions are creating a domino effect of rising insolvencies. Manufacturers receiving fewer orders are placing fewer orders with their suppliers in turn, often leading to those in a weaker financial position going under. Businesses in the manufacturing industry are also bearing the brunt of a labour shortage caused by Brexit and the pandemic. These businesses are finding they need to raise wages or invest in technological solutions such as automation – but cannot afford to, given current financial conditions.”