Negative contribution from the industry to UK’s tepid growth in July

12 September 2022

The UK economy grew during the first quarter of this year, although it shrank in March as soaring living costs and the war in Ukraine hindered recovery. The risk of a recession is increasing but there is positive news for our industry.


The overall manufacturing sector grew by 0.1% in July, although manufacturing of food, drink and tobacco had a negative contribution to growth.

As the country has been contending with double-digit inflation at a 40-year high and soaring energy prices, the economy has lost its growth momentum. In August, the Bank of England had predicted a recession before the end of the year. The new fiscal stimulus announced by the new prime minister in the form of a cap of £2,500 on the average annual household energy bills for the next two years and some kind of support (details are yet to be finalised) for businesses for the following six months might prevent a severe downturn. However, the UK economic outlook remains poor.

The capping of energy bills will bring some relief to households. However, the cost of living crisis will continue in earnest. The current energy cap is still more than double compared to 2019 or 2020, food inflation is likely to remain in the double-digits until mid-2023, while inflation will continue to outpace pay growth, eroding real incomes.

The energy intervention will slow down inflation in the short term, but boosting demand will raise inflationary pressures in the medium term, which might prompt the Bank of England to raise interest rates higher than it would have done otherwise.

Our industry has been through three structural shocks over the past six years. For the past two years, global pressures and staff shortages meant that manufacturers have been paying more for everything. Prices of global agricultural commodities have fallen in the last couple of months, however, in August, they remained 42% above their pre-pandemic level, with cereal prices 48% and vegetable oils prices 75% higher. Fertiliser shortages raise concerns about crops in the next year, so it’s likely that agricultural goods prices will remain elevated for a while. Moreover, the sterling depreciation is making things worse, as most of these commodities are traded in US dollars. The pound had lost 13% of its value against the dollar in August, which effectively means everything traded in dollars is 13% more expensive to UK manufacturers.

In short, the resilience of the industry has been eroded. Against this backdrop of intense pressures, gas prices have been rising by 400-500% on the year. Hence, Government support with energy bills is critical for the very existence of many of our members.