Export demand collapses and home‑building stalls, dragging UK factories into their worst spell since 2020 — yet energy stocks propel equity markets upward.

In a striking divergence between the real economy and the financial markets, Britain’s manufacturing sector is grappling with its steepest decline in new orders since the early stages of the pandemic, while the FTSE 100 surged to record highs, thanks principally to booming energy‑stocks.

New data from the Confederation of British Industry (CBI) show that manufacturers’ order books have deteriorated sharply in October. The monthly order balance sank to ‑38 from ‑27 in September — well below the long‑run average of ‑14. Both domestic and export orders contracted at their fastest pace since July 2020.

This slump comes amid a backdrop of sagging demand. Home‑building is decelerating, dampening demand for construction‑related manufacturing; exports are under pressure amid sluggish global growth and weak external demand. The CBI reported that output volumes in manufacturing fell in the quarter to October, mirroring the previous quarter’s decline.

Adding to the gloom, manufacturers say cost‑pressures—particularly energy costs—remain elevated, while export price pressures are negative, squeezing margins. Investment intentions have tumbled across nearly all categories, and employment in the manufacturing sector is falling at its fastest pace in years.

Yet despite this deep slowdown in manufacturing, London’s stock market is celebrating. The FTSE 100 closed above 9,570 points on Thursday, driven by strong performance in energy companies such as BP and Shell, as global oil‑prices jumped following sanctions on Russian exporters.

A Hard Landing for Manufacturing
For manufacturers across the United Kingdom, the signs are sharply negative. Nearly 14 of 17 industrial sub‑sectors reported declining output in the most recent CBI Industrial Trends Survey. The net balance for new orders fell to about ‑20% from ‑17% in the prior quarter.

Export orders, in particular, are a significant drag. The UK’s manufacturers, many embedded in global supply‑chains, are seeing demand soften from key markets in Europe and beyond. The Bank of England recently warned that trade‑weakness and post‑Brexit frictions are contributing to the slowdown in investment and productivity growth.

In addition, the home‑market is stalling. With construction activity losing momentum, the ripple effects are being felt through suppliers of materials, components and machinery. The manufacturing downturn is feeding into slower investment: manufacturers report sharply lower spending plans for plant & machinery, buildings and expansion projects.

Why the Disconnect with the Stock Market?
It may appear counter‑intuitive that stock markets are rallying while core industry is suffering. But the explanation lies in the composition of major indices and recent external shocks. The FTSE 100 is dominated by large multinational companies — among them energy giants. With oil and gas prices increasing (due to geopolitical disruptions including sanctions on Russian exports) these firms are seeing profits and market valuations climb.

Meanwhile, the domestic‑facing manufacturing sector is grappling with cost inflation, weak demand and reduced global competitiveness — factors that are less relevant to highly globalised energy firms. In short: the stock market is responding to one part of the economy (global energy) while another (manufacturing) is flagging.

Risks to the UK Economy
The dichotomy poses risks. Manufacturing remains an important part of the UK economy — it underpins exports, investment, innovation and regional employment. A sustained slump could drag on broader growth, productivity and earnings. One worrying trigger: energy costs. Manufacturers say high energy bills are a “significant factor crippling competitiveness”.

Also, authorities may respond to weak manufacturing with policy measures — tax rises, spending cuts or regulatory changes — all of which create additional uncertainty. The Chancellor’s upcoming Budget in late November will be closely watched by industry for signs of support or further burdens.

Finally, weaker manufacturing means fewer anchoring jobs in regions outside London and the South East — raising the prospect of deeper regional divergence and social‑economic stress.

What Needs to Be Done?
Manufacturers themselves point to several priorities: offer relief on energy bills or enhance the design of support schemes; avoid further tax increases on business; bolster export support services to help firms find new markets and raise productivity; and reduce regulatory and trade barriers to make UK manufacturing more competitive.

Some analysts are more skeptical, noting that structural factors (such as shifts in global supply chains, digitalisation, automation and deindustrialisation) suggest the manufacturing sector may not recover to its old strengths without deeper change.

Outlook
For the immediate future, the outlook for UK manufacturing remains subdued. With order‑books at their weakest since 2020 and cost‑pressures still high, most firms expect conditions to worsen rather than improve in the next three to six months. Financial markets may continue their rally — particularly if global energy remains volatile — but the real economy may lag.

For policymakers, the challenge is how to reconcile a buoyant equity market with deep weakness in the industrial heartlands. If the manufacturing downturn becomes entrenched, the UK could face longer‑term growth and productivity problems, even as headline stock‑market figures shine.

For now, this day stands as a vivid snapshot of this divergence: record highs in London boardrooms, and record lows in factory order books across the country.