Economic Roundup for small businesses June 2026

Kirsty McGregor: Now, I'm not joined by Paul this month, it's a special edition, and we've got a guest with us, and it's not the first time I've interviewed him, Fhaheen Khan, Senior Economist at Make UK is the organisation that represents, supports, and champions our manufacturers across the UK, and he's going to join us to discuss the latest economic situation. It's especially timely today. We are recording on Monday morning, the 15th of June. I have to timestamp this with the way that things are going so fast at the moment. But they have also published their Q2 Manufacturing Outlook report. So, welcome, Fhaheen. Thank you for joining us.

Fhaheen: Thank you, I appreciate it.

Kirsty McGregor: Now, I'm just going to start with some stats about the sector, in case you're not aware of how big, still, the manufacturing sector is. I think we do tend to put it down a little bit, that, oh, it's not like it used to be, but actually, it's still absolutely huge. So there are around 140,000 manufacturing companies in the UK, employing up to 2.5 million people. If you add into that, then, the businesses that are unincorporated, it becomes far more than that. And manufacturing accounts for 47% of all private sector R&D in the UK, so our innovative companies. And it represents 17% of total UK business investment. So, a very significant part of our economy.

Now, just to go back in time a little bit, last time we recorded was, way back in November 22. So, getting on for 4 years ago now, but inflation then, if you remember, was over 10%. Liz Truss and Kwasi had just done their mini budget in the October, which resulted in her getting a short shrift out of Downing Street. And by August 23, the year after, the interest rate was 5.25%, and it stayed that way for a very long time. Now today, if we look at the situation, inflation is 2.8%, base rate is 3.75%, as of today.

Unemployment figures aren't disastrous, although they are ticking up a little bit. Financial markets are fairly calm, both here and in the States. GDP is growing, albeit slowly, so if you come back from, say, 12 months on a desert island, and you were looking at the stats, which I'm sure you would do as soon as you came back from a desert island, but you'd be actually forgiven for thinking we're in quite a strong place, wouldn't you, Fhaheen? But your survey doesn't say that, does it?

Fhaheen: Yeah, I think it's interesting that the chaos and the shock of the last few years actually puts a lot of what we're experiencing today into perspective. You know, manufacturers have been firefighting, I suppose, crisis after crisis since Brexit, since the referendum. I think we're almost, I think, 10 years since that referendum took place, so it's another point to think about. And today, we are seeing that businesses have grown far more resilient in that time, that they have almost grown accustomed, and maybe even a little bit comfortable with the chaos, that they sort of understand how to manage it, they pour more risk management systems in place, and that they are kind of working through the motions of those challenges. However, we were expecting, at least from AK perspective, that at least in our latest data, that businesses would have struggled a little bit more than they would, than we thought they would have by this time this year, because we have the impact of the crisis in the Middle East, and we knew that that was massive spikes to not just gas prices and oil prices, but also we rely on the Middle East for a lot of, components and ingredients, like… like agricultural fertilisers, like helium, and all these things that you can only get from that part of the world.

And we've seen businesses have been relatively resilient to that, but at the same time, their optimism is dropping. You know, they're not confident about the future, they're saying things are okay now, but they don't believe that that's how it's going to be 12 months from now, and that may be partly reflecting their behavior. You know, human beings, by nature, when we get anxious, when we're worried about the future, we immediately start saving for a rainy day.

We start acting more cautiously, we start stockpiling, and we see, I think, a little bit of that effect is taking place, where businesses who are worried about tariffs, worried about energy prices, their best solution is, let's get as much business as we can get done right now, so that we don't have to be in a more difficult situation in the future, and I think we're seeing a little bit of that now.

Kirsty McGregor: Making a hay while the sun shines, if you like. Although it's not completely shining, but… but let's look at some of the stats then, because it seems like manufacturers have taken some action, and we'll come back to different actions that manufacturers have taken in a little while, but it looks from your survey that 27% of manufacturers have already moved production overseas, or consider doing so, which, you know, is not great for our employment capabilities. 38% are delaying investment because of, specifically, energy cost concerns. 21% are cutting jobs, maybe down to digitalization and AI, but also down to moving overseas, and 1 in 10 manufacturers believe insolvency within the next year is likely, or very likely. So this completely rings true with what you're saying, that their thoughts for the next 12 months are they're quite nervous.

And I was looking back to what you were saying last year, and you were concerned then that we weren't competitive enough, and I guess around the, you know, energy costs in particular. And this, then, is still concerning you, isn't it? I think although you are more surprised that the figures aren't worse already.

Fhaheen: Yeah, I mean you know, we have the most the highest industrial electricity prices in the world. I think we are 47% more expensive than the international average, so we are effectively the most expensive place on the planet to run a factory.

And so, it's a very difficult proposition for any investor, for any business to think about, you know, do I expand a factory here, do I do it elsewhere? And the choice to move abroad is becoming easier. We're effectively making it easier. Now, I think manufacturing and the deindustrialization of manufacturing is a huge risk to our economy, not just from an economic and financial perspective, but from a national security perspective. Now, we have, you know, it's been almost, I think, over 260 years since the Industrial Revolution happened in the UK, and the UK has been one of the biggest powerhouses for manufacturing ever since then. We are, even today, one of the top 20 largest manufacturing nations in the world, but we've been on a downward trend. Only 3 years ago, we were 9th biggest in the world.

And people often didn't realise that we still made a lot of things here, but we have been moving down that trend, we're now 12th largest in the world, and we are effectively losing capacity to do things. Now, the losing jobs, losing less investment than we would have liked, these are all negative things, but actually, when you're thinking about what's happened in the Middle East crisis. Then we had, some of the stories around what happened with the Defence Secretary last week, and the lack of investment in defence. We are putting ourselves in a position, or risk putting ourselves in a position where we're no longer able to make the things that we need. And think about what, you know, manufacturing is a very broad term, but you just think about everything around you, that everything that you can touch, you can see, you can feel, has probably been manufactured somewhere in a factory, and is being used to enable you to continue your life. And so we are at a I guess this could be an inflection point for the industry, where actually, is the UK going to be a nation that still has a manufacturing sector 10, 20, 30 years from now? And how do we survive without one? So that, that is perhaps the, you know, the thing that most businesses are worried about, and we don't blame them for considering. Now, when it comes to moving overseas, there are different ways to do it, and often, you know.

There's the first way is the kind of the big move, where you hear a big brand, and then they put out a statement saying, we're moving all of our stuff to China or Turkey or whatever it is, but there's the there's a more, kind of, the stealth type way that some manufacturers do it, where they don't move their entire business away from the UK, but they might move the energy-intensive production part, and they just move that section out of the UK, and they might keep the R&D and some of the finance and the HR and all that stuff maybe in the UK, but we actually lose the part that does all the making, all the production, all the productivity. And, you know, and they're doing that because it's a sensible business choice. It keeps costs low, it means that the products that we buy, we can make sure that we can buy them as cheaply as possible, but then what do you do in a global crisis where suddenly the ports shut down, or the energy prices have spiked, or China has decided that they're going to keep all of their capacity domestic because they need to protect their own people?

And suddenly you're not able to operate without that. So there's a lot to think about. I think that, you know, we at Make UK, we've been banging on this message to government for a very, very long time, but I think now we're starting to see the lack of seeds being sowed in that industry is now having an effect that is more circular in nature that it's a self-fulfilling prophecy that if you don't believe in that sector, then it's obviously not going to thrive. And given what it's done for us, we should probably we should give the manufacturing industry more respect to what it's given to the UK, and support it more appropriately.

Kirsty McGregor: I agree completely. From the northwards. The birth of the Industrial Revolution in Yorkshire and Lancashire was, yeah, we see it all here in reality. So, a question I wanted to ask you is, this time last year, we were all talking about the tariffs, the big US, policy change, to great fanfare, if you remember, on the 1st of April last year. And that then went on and on and on, those discussions.

Which tariffs for which industries, and things were changing, and on and off, and up and down, and then the court hearings most recently over in the States, and what is going on with tariffs at the moment? And more than that, like, what impact have they had on our industries in the UK? You know, whether they're exporting to the US or just getting impacted by the headwinds from it all. You know, what have you seen that's going on with tariffs?

Fhaheen: Yeah when the US presidency first announced these tariffs, you know, they were… narratively speaking, it was all about Asia and China, and this was like, oh, you know, it's not about you, the UK, or the EU, we're still friends with you, we just want to make sure that China's not, kind of, I guess, negatively impacting our industries. But then they, because they were global tariffs, they had a huge impact on UK manufacturers. Now, the US is not our biggest trade partner, because the EU substantially dwarfs the US. You know, we export about, I think, about 300 billion pounds or 360 billion pounds to the EU collectively, and then the US is seeking about 60 billion pounds of exports as an individual country, but as an individual country, if you separate the Germany and the France, the US is actually the biggest export partner for the UK. There's a very significantly historical relationship there, and manufacturers were affected, particularly industries like automotives, the aerospace sectors, like pharmaceuticals, because, you know, we produced a lot of medicines and we exported to the US.

The impact has been it was quite interesting, because I talked about the savings for a rainy day behaviour. We saw a little bit of that at the initial stages when the tariffs were announced. We actually saw a huge spike of, exports to the US and imports from the US, last year in January, I think it was, where manufacturers were rushing for before the first set of global tariffs were coming in.

And since then, you know, there have been talk of US-UK deals and renegotiations and opportunities, but actually the impact has been largely, disruptive. Now, it hasn't affected business that much, because manufacturers in the UK and the manufacturers in the US, you know, they're quite historical relationships there. People often forget that B2B relationships aren't just goods moving from one place to another. It is a very human-based relationship, and actually, if you've got suppliers or customers in the US that you've had a relationship with them for a very, very long time, you don't cut them off because of tariffs, you just continue working around that. So it was disruptive. It was, of course, likely inflationary for the domestic, like, U.S. country. As well, but it was also likely inflationary for us in the sense that many manufacturers in the US were also increasing the costs of their exports to the UK, so they were passing on those costs to us. But we've also seen examples of many UK businesses who are working hard to maintain those relationships, where whilst US manufacturers would normally pay the tariffs, we have seen examples of some of our own members who were offering to pay the tariffs for the US manufacturer in order, as a goodwill gesture, to help maintain and keep their business alive. So I think that's a positive side of manufacturers who are working within the difficult environment that tariffs set.

Now the other side of what's happened since then, and we've seen this because our CEO has been traveling around different countries, and then meeting different people, is that because the tariffs applied globally, many countries who were suffering in the same way almost found unity with each other, because they were finding comfort in their own, like, oh, we're all being treated like enemies by the US, let's all band together and work together. And we've certainly seen more countries, those who were more directly affected by the US, proactively and aggressively looking to build their own direct relationships for trade, so that they don't have to rely, become as reliant on the US anymore. Canada is a great example of that. Certainly, they have been coming to the UK more, they've been sending trade ambassadors to the UK, and we've seen countries going straight to them, who have been looking to build more direct relationships with Canada. And I think this might be one of the negative impacts directly to the U.S, that even if this whole tariff debacle ends, there's going to be a different perspective of, do we think the US is a reliable, friendly trading partner from this point on going forward? And that's going to change the type of deals and negotiations that you're going to get. Of course, they're a huge economic market. There's, like, 350 million people there, and there's high incomes over there. You're always going to want to sell stuff to there. But it's not the only country in the world. Actually, if you could… all the other countries combined is far more larger, economically speaking, than the US is as an individual country. And I think that might be something that they might come to regret in the future.

And it's not I mean, we have this special relationship, but we have seen evidence of our own businesses, those who continue to trade with the US, but we've also seen many businesses turn away from the US and actually saying, well, you know, maybe trading with… more with Japan, more with China, more with Indonesia, those are not bad things to do, let's go look for opportunities there. And everybody now speaks English, you know, and that, you know, that used to be a barrier to trade, that people didn't speak English, and because we could speak English in the US and Europe, it would be easy to trade with them. But, you know, everyone in China, business people, they speak English. Japanese, they can speak English, and now it's easier to trade with them. So that's an impact of trade and clarity.

Kirsty McGregor: Yeah, certainly. I guess it's going to come down to what happens at the end of the Trump term. I mean, we know he's got another two years and a bit left, but it's who comes in then and what happens, but I think it has been I agree. I think it's been seismically changed for forever, the relationships that we have with the states now. And then let's… let's move then on to the high energy costs issue now, and I've seen some, really good statements in the House of Lords, and really explaining why this is a real problem, for UK industry, because they don't have the same protections that consumers have. So, ff they are renewing their contracts, and they're usually, you know, annual if multi-year contracts. Those suppliers are pricing for the future themselves, and so they're well, they've already hit prices, so even if, you know, the news this morning as we're recording, is that the Straits of Hormuz will be open imminently. Well, we've heard that for a couple of months, but even if it does, you know, it's still going to have had an impact already on a lot of companies.

In respect of their energy costs. And so, we know that they're already delaying investment. According to your survey. But even since that survey was conducted, we've now seen fresh domestic political uncertainty in and amongst the Labour Party and the leadership. And if we have new leadership, that's a prospect of further tax changes. Depending on who the leader becomes. So, do you think that could be making businesses even more hesitant to invest and plan for the future, because one thing that we were assured of is that capital allowances were going to stay the same, and that there was going to be some, you know, some stability around tax. But given what you've said about the defence, we know is going to be a big bill, welfare, NHS, the Chancellor has been really struggling to keep her promises as per the manifesto. This could be the time that that gets ripped up. And therefore, we're going to have quite significant tax changes. How do you think manufacturers are reacting to what's going on now?

Fhaheen: I mean, they will react very negatively to more taxes. I mean, manufacturing as an industry, they were a big beneficiary of some of the tax relief supports available. You know, being one of the dominant R&D expenditures means that they are also probably one of the biggest users of the R&D tax credits. Being very capital-intensive means that they're probably one of the biggest users of capital allowances, the full expensing, the annual investment allowance, a lot of these tools are there to rebalance the scale, but it is all relative to how much you tax them versus how much you allow enable them to relieve. And if you were to increase the the weight on one side of those scales, which is adding more to the tax, and actually, you almost start to do away the benefits of those reliefs. Now, for manufacturing, the biggest factors that influence investments, well, the first one is, of course, around confidence. I think all investors and businesses will say it's about how much they believe they have on whether or not that investment is going to lead to something good. And at the end of the day, investment is kind of a bet you make, it's a bet on growth in the future, that, you know, I will pay some money today and hopefully get some growth in the future, and if you don't believe that's gonna happen, you won't get that. Our research shows that the strongest business predictor of investment decisions from CFOs and CEOs, is that it's cash flow directly links to investment, and it's specifically cash flow today positively impacts the willingness to invest in the future. And our Manufacturing Outlook Survey, which goes back about 30 years, we have a metric that measures current cash flow performance, and you can plot that against future investment intentions.

And you almost get a straight line that goes up like that. It's like, every time a business says, my cash flow is good, they actually say, I'm willing to invest in the future. And so it's a huge predictor, and the more you increase taxes, which reduces cash flow for businesses, you are indirectly telling the industry that, you know, to not invest, and that's how they're going to react. And the reliefs can help, but then they also have to make sure that they have enough cash in their bank to pay their energy bills, to pay the labor cost increases, and we know labor costs have been going up, and there are so many other bills. Most taxes, or many taxes, are not performance-related, you know? Business rates, for example, has nothing to do with how well you do as a business. You know, national insurance contributions, for example, is a big one. It depends on how many people you employ and what salaries you pay them. It's not really about how well your business does. And I think most manufacturers, what they tell us is that if taxes were more performance-related, then that would enable them to invest, because then you take away the disincentive to grow.

Because they're only penalised when they grow really well. But if they're punished, even when they do nothing, then there's no incentive to even start investing. And we do see that. I mean, some businesses get around it, but we're a unique outlier in the OECD. We have the highest, I think, proportion, so the property tax intensity, which is how high our property taxes are relative to our GDP, you know, we rank number one on the Tax Foundations list across the OECD, which is not where we would like to be. You know, if we want to be an attractive place to grow and invest, you know, that we shouldn't be topping the league tables for metrics like that.

Kirsty McGregor: No, I agree, gosh. So, let's turn to some more positive thoughts. If we're speaking now to accountants and advisors of manufacturing companies, manufacturing business owners, and other business owners as well, who are all facing similar things to manufacturers.

What are you seeing, you know, from the best leaders? What is it that they're doing differently to negate the impact or minimise the impact of these higher costs, labor costs, energy costs, geopolitical uncertainty, and everything else that's going on for them. You know, what are the good things that you're seeing out there?

Fhaheen: Yeah. Whilst the average is generally negative, there are, of course, some standout businesses, particularly even in our own membership. We see them who are, you know, super we could describe them as super businesses who are really growing and focused on the future, and whilst the headwinds hold them back, they keep moving forward. And what we do see, particularly on some of our research, those that demonstrate the highest levels of productivity.

The two areas that they probably exceed on are investment in skills. They don't compromise on training and developing their people, both the kind of mid-level junior people when it comes to developing their digital skills and their engineering skills, but also investing in their leaders. Now because of cash flow issues, you know, when there's a business struggling, often they do cut back on investment in training, because it's an easy one to give away, and then you sort of expect people to learn on the job and through trial and error. And that works too sometimes, but it's not the most effective way, and the most productive businesses, they don't compromise on their people development. The second one is, of course, the willingness and the ability to adopt the latest technologies. You know, digital technologies, AI, robotics, automation is huge in manufacturing, but globally, the UK is an outlier, that we are the only country in the G7 that is not one of the top 10 countries that, is at the highest end of adopting robots per 10,000 employees. It's by the Institute of International Federation of Robotics, they measure this data. But those who are the best businesses, we've seen that they tend to put automation and productivity at the front of their business strategies, but not to replace workers. They're always thinking about how does robots work with the humans that they have? So they're thinking about robots and about machines on the factory lines.

How do we train up the staff to use the latest technologies? How do we get the latest technologies into the factories? And those are the businesses that tend to exceed, despite the headwinds. Now, that includes energy efficiency technologies as well. Those who are struggling with energy prices, actually, they're, you know, they've taken the best ones have taken a lead on, for example, installing solar panels and getting generators, or adopting the latest machines so that the, you know, newer machines tend to be less energy-intensive than older machines, and they look ahead. You know, you might pay a high expense now, but actually, I think well, I don't want to say that Boris Johnson gave this really example of a microwave a couple years ago, where he was trying to explain to people, if you buy a new microwave, it's expensive today, but actually the energy it uses every single day is a little bit less. He did a really bad example of that example at the time on Deltelli, because everybody's energy crisis was going up, and it was just really bad timing, but I understood the logic of what he was saying. And the same applies to big capital equipment as well. The newer stuff generally is made with a higher grade of energy efficiency than the old stuff. You know, you've got the little if you've got a fridge, I don't know when you bought your fridge, Kirsty, but you would have had, like, an A, B, C, D, E category, you know, the C grade today is, like, much more efficient than what C-grade meant 10 years ago, because it's just, like, those standards have completely changed. And so those businesses are, I think, what we see. Those who are at the forefront of people and machines are perhaps the ones we need to learn more from.

Kirsty McGregor: Yeah, yeah. Yeah, no, that's fascinating. I've got I'm about to buy a new fridge and a new microwave, I think, now.

And don't forget, Made Smarter, you know, is absolutely fantastic, isn't it? You know, as a thing that we have in this country, to support manufacturers digitalizing, thinking about green energy, and even grants, and so on, that it's just such a great scheme. I'm so pleased it's now been rolled out, or almost rolled out, around the whole of the UK. So, yeah, I think anyone listening should definitely be aware of that.

So, last question for you today. Thank you very much for your time, and giving us some insights into what businesses are going through at the moment, and the ones that are performing better.

But this week, big week this week, we've got a by-election in Mayfield. Who'd have thought, the outskirts of Wigan would have been so focused of the whole of the global news industry? We've also got the Bank of England rate decision, the Monetary Policy Committee on Thursday. So, what do you think is going to happen to interest rates? What do you think they'll do? Get your crystal ball out, Fhaheen.

Fhaheen: I think if you asked me maybe a year ago, I would have said they were definitely going to cut the rates, but I think today, given all that's happened, they're more likely to hold the rates where it's at. Now, the reason they'll probably do that is because there is some indications that the situations around the world might ease a little bit, and so actually there's no reason to raise the interest rate at this point, if you don't think that that's if the situation's gonna escalate.

So I believe that it probably makes the most sense for them to hold, although I would much rather prefer a kindness. Yes, yeah.

Kirsty McGregor: I think it'll be a hold this week, but I'm not always right, so we will see what happens. But listen, thank you ever so much for your insights today. It's been really useful, and look, keep up the great work you do at Make UK, and maybe we'll speak again in another few years.

Fhaheen: Yeah, I would love to.

Kirsty McGregor: Thanks Fhaheen for your time.