The short-term outlook for the UK food manufacturing sector is “not encouraging” as manufacturers are expected to absorb a significant part of input cost increases, according to a report by the Food and Drink Federation (FDF).
In May, food and drink manufacturing had the third largest contribution to manufacturing growth, as the UK economy grew by 0.5% overall. However, this growth was offset by prices rising at their fastest rate in 40 years.
June’s S&P Purchasing Managers’ Index data for manufacturing showed new orders intake fell for the first time since January 2021, while new export orders contracted for a fifth consecutive month.
The FDF report predicts that manufacturing output growth will slow down in months to come, with “a real possibility of it going into negative territory.”
The Federation also say that the Bank of England is likely to raise interest rates for a sixth consecutive time at the August’s policy meeting, with a potential raise in excess of 0.25 percentage points.
It said: “Most commodities are significantly more costly than they were in February of this year and the tight labour market supports wage growth. This means that it will take a while for inflation to be brought under control.
“For food and drink manufacturers, this means they will be confronted for a while with higher input costs. Moreover, our sector is energy-intensive, therefore disproportionately impacted by the rise in energy prices. This will hurt long term growth and investment, as manufacturers absorb a significant part of cost increases.”
The FDF laid out its list of action that the UK government could do to “ease some of the pressures on businesses and shoppers.” This includes:
- Looking again at VAT reductions on food and drink
- Reducing the cost of regulation, for example, by suspending the plastics packaging tax
- Making the apprenticeship levy more flexible so all sizes of businesses “can use it effectively”
- Working constructively with the Devolved Administrations to ensure that regulation does not diverge across the UK’s nations.
