UK Manufacturing PMI Hits 17-Month High: What Is Driving the Recovery?

The UK manufacturing sector has begun 2026 on firmer footing than at any point in the past 17 months. The S&P Global UK Manufacturing Purchasing Managers’ Index (PMI) rose to 51.8 in January, up from 50.6 in December, marking the fastest pace of expansion since August 2024.

For manufacturing directors and operations managers navigating an uncertain global landscape, this upturn raises an important question: is this a genuine inflection point, or simply a temporary reprieve?

The data suggests cautious optimism is warranted. Understanding the forces driving this recovery, and the headwinds that remain, is essential for any manufacturer planning their strategy for the year ahead.

Understanding the PMI: Why This Number Matters

The Purchasing Managers’ Index is a monthly survey of approximately 650 UK manufacturers, compiled by S&P Global Market Intelligence. It measures changes in output, new orders, employment, supplier delivery times, and stock levels. A reading above 50 signals expansion; below 50 indicates contraction.

January’s 51.8 reading represents the fourth consecutive month of growth for UK manufacturing. More significantly, the new orders component jumped to 53.2, up from 50.2 in December, its highest level since February 2022. This suggests demand is strengthening, not merely stabilising.

Rob Dobson, Director at S&P Global Market Intelligence, noted that UK manufacturing “made a solid start to 2026, showing encouraging resilience in the face of rising geopolitical tensions.”

Export Orders Rise for First Time in Four Years

Perhaps the most striking element of January’s data is the return of export growth. New export orders rose for the first time since 2022, with manufacturers reporting stronger sales to Europe, the United States, China, and several emerging markets.

This is a significant shift. British manufacturers have faced persistent export headwinds since Brexit, compounded by global supply chain disruptions and weak demand in key markets. The return to export growth suggests that some of these pressures may finally be easing.

Cara Haffey, Leader of Industry for Industrials and Services at PwC UK, highlighted the significance: “New export orders have increased for the first time in four years, with heightened activity from Europe, the US, and China and other emerging markets. It’s reassuring to see business optimism starting to recover.”

The geographic breadth of export recovery is particularly encouraging. Rather than being concentrated in a single market, UK manufacturers are seeing demand strengthen across multiple regions simultaneously.

Confidence Rebounds After Budget Uncertainty

Business confidence has recovered notably from the uncertainty that followed the 2024 Autumn Budget. Almost three in five manufacturers (58%) now expect their output to increase over the next 12 months, the highest level of optimism since before that Budget.

This confidence is being translated into investment intentions. According to the Make UK/PwC Executive Survey 2026, manufacturers are prioritising:

• New product development: 80% of companies are investing
• Digital technologies, AI and automation: 76% are investing
• Expanding product portfolios: 55% are planning expansion
• Exporting to new countries: 42% are targeting new markets

The Industrial Strategy appears to be a significant driver of this optimism. More than half of companies (57%) say a long term industrial strategy and sector plans will have the biggest impact on their growth this year, with nearly two thirds (63%) saying they will bring forward investment in response.

Stephen Phipson, Chief Executive of Make UK, noted: “Manufacturers have demonstrated their resilience over and over again in recent years, and those that remain innovative and are prepared to invest in new technologies, expanding markets and, most crucially, their people will continue to thrive.”

UK Outperforming the Eurozone

The UK’s manufacturing recovery stands in contrast to conditions across the eurozone, where the sector remains in contraction territory.

The HCOB Eurozone Manufacturing PMI edged up to 49.5 in January from 48.8 in December. While this represents a two month high, it remains below the 50 threshold that signals growth. Output returned to marginal growth, but new orders continued to fall for a third successive month and export demand weakened further.

National divergences within the eurozone are stark. Greece, France, and the Netherlands recorded expansion, while Germany, Italy, Spain, and Austria remained in decline. Compared with the euro area’s fragile recovery, UK manufacturers appear to be benefiting from relatively stronger momentum.

This outperformance matters for two reasons. First, it suggests that UK specific factors, rather than simply global tailwinds, are contributing to the recovery. Second, continued eurozone weakness could present both risks (if it depresses demand for UK exports) and opportunities (if UK manufacturers can capture market share).

The Two Speed Recovery: Large vs Small

The recovery is not uniform across the sector. The data reveals a clear divergence between large manufacturers, who are driving growth, and small and medium sized enterprises (SMEs), who continue to struggle.

Large manufacturers reported increased output and modest hiring in January. By contrast, SME output declined for the third consecutive month, and smaller firms continued to reduce headcount.

This divergence likely reflects several factors:

• Scale economies in absorption of cost increases: Larger firms are better positioned to absorb rising employment costs and pass through price increases
• Access to capital for investment: Large manufacturers have greater capacity to invest in automation and digital technologies
• Export capabilities: Larger firms typically have more established export infrastructure and can capitalise more readily on recovering overseas demand

For SME manufacturers, the path to recovery may require different strategies, including partnership with larger firms, pooled investment in technology, or focused targeting of niche markets where they can compete effectively.

Sector Performance: Winners and Laggards

The sectoral picture is similarly uneven. Growth was concentrated in consumer goods and investment goods segments, while intermediate goods producers saw output decline.

This pattern suggests that end market demand is recovering faster than supply chain activity. Consumer facing manufacturers are benefiting from resilient household spending, while producers of capital equipment are seeing increased orders as businesses invest. However, manufacturers of components and materials used as inputs by other industries continue to face weak demand.

For intermediate goods producers, this may be a lagging indicator. As end market activity strengthens, demand for inputs should follow. However, the timing remains uncertain, and these manufacturers may face a prolonged period of subdued activity.

Cost Pressures: The Persistent Headwind

Despite improving demand, cost pressures remain a significant concern. The PMI survey showed that input cost inflation edged higher in January, driven by several factors:

• Rising commodity prices: Metals, energy, and freight costs are all increasing
• Employment cost increases: The pass through of increased minimum wage and employer National Insurance contributions continues to work through supply chains
• Supply chain constraints: Delivery times lengthened as purchasing activity increased at its fastest rate in more than three and a half years

These cost pressures are prompting manufacturers to raise their own selling prices for a second consecutive month. However, the ability to pass on cost increases varies significantly by sector and market position.

The Make UK survey found that almost nine in ten companies (86%) expect their employment costs to increase in 2026. Similarly, 79% anticipate higher material and input costs, and 67% expect increased business rates.

Make UK warned that while some increases result from global factors, domestic employment and other business costs “are threatening a tipping point whereby investment plans will either be cancelled or shifted overseas.”

Employment: A Stabilising Picture

Despite the stronger demand backdrop, employment in manufacturing continued to fall in January, extending a 15 month run of job losses. However, the pace of cuts was the slowest in that sequence, suggesting the labour market may be nearing stabilisation.

Large manufacturers reported modest hiring, offsetting continued reductions at SMEs. The overall picture suggests a sector adjusting its workforce composition rather than engaged in wholesale retrenchment.

Richard Powell, partner at MHA, observed: “The labour market has begun to even out, but businesses are not replacing roles that have been cut, which could accelerate a longer term shift toward automation. But automation requires significant investment; you cannot just rip up the factory floor overnight.”

Implications for Interest Rates and Economic Policy

The manufacturing PMI adds to evidence that the UK economy has strengthened in recent months. Jake Finney, Senior Economist at PwC, noted that “the figures imply the UK economy has weathered geopolitical disruption so far, with the PMI consistent with GDP growth of over 1.5% in 2026.”

This strength is likely to influence Bank of England decision making. The Monetary Policy Committee is widely expected to hold interest rates at 3.75% in February, with the combination of resilient economic activity and persistent inflation militating against an early cut.

For manufacturers, this means that borrowing costs are likely to remain elevated for longer than some had hoped. Investment decisions should factor in the probability that significant rate cuts may not materialise until later in the year, if at all.

What This Means for Manufacturing Strategy

The January PMI data points to several strategic implications for UK manufacturers:

1. Export Markets Deserve Renewed Focus

With export orders rising for the first time in four years, manufacturers should reassess their international market strategies. The breadth of recovery, spanning Europe, the US, and Asia, suggests opportunities across multiple geographies.

2. Investment in Automation Becomes More Urgent

The divergence between large and small manufacturers, combined with persistent employment cost pressures, underscores the importance of productivity investment. Those who delay automation may find themselves increasingly uncompetitive.

3. Supply Chain Resilience Remains Critical

Lengthening delivery times and rising input costs highlight ongoing supply chain fragility. Building buffer stocks, diversifying suppliers, and strengthening supplier relationships should remain priorities.

4. Pricing Strategy Requires Sophistication

With cost inflation persisting but demand strengthening, manufacturers have more room to pass on price increases. However, this must be balanced against competitive dynamics and customer relationships.

5. The Industrial Strategy Creates Planning Opportunities

Manufacturers should actively engage with the Industrial Strategy and sector specific plans. Those who align their investment strategies with government priorities may benefit from support programmes and funding opportunities.

Looking Ahead: Reasons for Caution

While the January data is encouraging, several risks warrant attention:

• Geopolitical uncertainty: Trade policy developments, particularly regarding US tariffs, could disrupt export momentum
• Cost inflation persistence: If input costs continue rising faster than output prices, margin pressure will intensify
• SME vulnerability: Continued weakness among smaller manufacturers could have broader supply chain implications
• Policy uncertainty: The Employment Rights Bill and other regulatory changes add to business planning challenges

Matt Swannell, chief economic advisor to the EY ITEM Club, cautioned that the upbeat PMI reading “should be taken with a heavy pinch of salt,” adding that “it’s likely that 2026 will be another subdued year for UK manufacturers as fiscal policy continues to tighten, households’ real income growth is set to slow, and international trade policy uncertainty remains elevated.”

Conclusion: Measured Optimism Is Appropriate

The UK manufacturing sector enters 2026 in its strongest position for 17 months. Export recovery, strengthening domestic demand, and renewed business confidence provide genuine grounds for optimism.

However, this is not a return to boom conditions. Cost pressures remain acute, the recovery is uneven across firm sizes and sectors, and external risks persist. The businesses that will thrive are those that treat this moment not as an endpoint, but as an opportunity to invest, innovate, and strengthen their competitive position.

As Cara Haffey of PwC summarised: “The manufacturing sector appears resilient, facing headwinds with renewed confidence and a focus on future growth opportunities. Pressures such as employment levels, supply chain resilience and costs will require business leaders to remain agile, innovative and focused on growth plans.”

For UK manufacturers, the message is clear: the recovery is real, but so are the challenges. Success in 2026 will belong to those who combine optimism with clear eyed assessment of the risks, and who invest accordingly.