UK manufacturing sector looks to Defence spending to drive growth - report

The UK manufacturing sector continues to face significant challenges, ranging from supply chain attacks to high energy and employment costs, but two thirds of manufacturers remain on a positive growth trajectory, highlighting the sector’s resilience.

That’s the finding of the latest Manufacturing Outlook Report produced by audit, tax, advisory and consulting firm Crowe, conducted in partnership with the Confederation of British Metalforming (CBM).

The report examines what is driving this resilience, and how businesses are responding to challenges.

It reveals 82 per cent of manufacturers are using their own resources and internal reserves to fund growth – up 30 per cent from 2024.

And while 66 per cent expect their business to grow in the next 12 months, 54 per cent see ‘uncertain return on investment’ as the primary barrier to investing in innovation or R&D.

Forty-one per cent see ‘cost volatility’ as their biggest supply chain concern.

Fifty-six per cent are ‘actively implementing’ a Net Zero strategy but 39 per cent believe the ‘high cost of green technologies’ is the biggest challenge in reducing carbon emissions

Johnathan Dudley (pictured), partner and head of manufacturing at Crowe, said: “The time is now for UK manufacturing to reassert itself on the global stage. Through 2025, rising energy and employment costs, new cybersecurity risks in supply chains, and a shortage of skilled workers have continued to hamper our businesses.

“In spite of this, the sector has remained resilient, with businesses expecting growth and continuing to invest.

“The obvious need, which will unlock the sector’s true potential, is tangible government support. It is time for the UK to deliver on the Industrial Strategy and make manufacturing the crown jewel of the economy once more.”

He said the government’s call for defence “reinvestment” is a welcome sign of encouragement.

“Manufacturers now have a patriotic duty to play their part in revitalising growth.”

Resilience remains the key growth buzzword for 2026.

Dudley added: “Cybersecurity risks in supply chains have created anxiety and uncertainty, with the long-term impact of the Jaguar Land Rover cyberattack yet to fully play out, while an over-reliance on trading partners is now creating tension due to the geopolitical climate.

“As Defence spending surges, the manufacturing sector must capitalise. But with 82 per cent of businesses funding growth using their internal reserves, unlocking the sector’s potential relies on attracting more external investment.”

The survey highlights the persistent and widening skills gap that is hampering the sector, with 64 per cent of respondents citing a lack of qualified applicants as their biggest recruitment challenge.

While innovation has been highlighted as a focal point for growth by the government, manufacturers remain cautious of investing heavily, with nearly half of all SME manufacturers not submitting an R&D claim in the past year.

The dominant barrier stated is financial uncertainty – 54 per cent cite an uncertain return on investment as the main reason for holding back on innovation, with fears that new measures from Finance Bill 2025 will only make matters worse.

Dudley said: “This reliance on self-financing is unsustainable, and the UK government must ensure it makes the country a more attractive place to invest than the rest of the world, otherwise skilled labour shortages and a stalling innovation environment will continue to hamper the sector in the coming years.”

Supply chain resilience also continues to dominate strategic thinking, with 41 per cent of businesses most concerned with cost volatility, reflecting ongoing fluctuations in materials, logistics and energy markets.

While geopolitical uncertainty was the second largest concern, it has sparked a shift to onshoring, with 98 per cent of SMEs considering bringing parts of their supply chain back to the UK.

Dudley added: “Reshoring to the UK can enable businesses to better control their carbon emissions, provided that essential skilled employees, components and raw materials can be sourced and supplied competitively.

“With the UK Carbon Border Adjustment Mechanism (CBAM) on the horizon, the measurement of Net Zero initiatives will become increasingly important.

“Knock-on impacts could see improved lead times and stock holding, as well as employment opportunities and job security for the UK workforce.” 

Read the full report here.