Read the full Q2 2026 Quarterly Review
4 minute
On the face of it, this second quarterly survey of the year is a further – and significant – step in the right direction for our industry outlook. In March we reported that this was our first survey in a year and a half where our headline measures of order intake and output volume were positive, and whilst orders weren’t particularly far above the line at +6%, the swing from deficit to surplus was a healthy +18%.
Our June result takes that on by more than just a notch with order intake up to +17%, matched by output volume at +20%. These values are solid good news, based as they are on the last 3 months actual trading results, so before we let optimism get ahead, we need to check our forecasts.
Again, this is reassuringly positive. All order intake is forecast to go up by an average of 23%, strongest for large companies, but still a respectable +21% for small, and output volume is just ahead at +27% averaged across all businesses.
The note of caution which you likely sensed was coming, is optimism, descending from a welcome breakthrough to +5% last quarter to a twelve-point fall to -7% for this report.
It’s good to pause and ask if this is as significant as it feels, and that’s a question we are uniquely able to answer. As the founder and custodian of Scotland’s only engineering and manufacturing specific quarterly survey, we now have thirty-five years of drumbeat data that reflects the state of our sector in Scotland.
The combination of positive orders plus positive output equals negative optimism feels like it should be a rare occurrence, and my expectation was that this might be something that occurred where the world felt normal but the sense of challenge coming was evident. An unwelcome return to war in Europe, a global pandemic, the call for a tungsten-tipped Brexit or a banking system crash might be expected to fit the bill.
In fact, it’s been twenty-one years since this combination occurred, in June 2005, prompted by the outlook of restructuring for our then still relatively high-volume electronics sector, despite overall positive orders and output.
A rare occurrence then. For the reasons behind it, member companies make us aware of the multiple challenges directly and through the forums and events we host, but on this occasion, my sense of the top two concerns was clear from the email traffic and conversations of the last few weeks.
The ongoing stranglehold on the Straits of Hormuz is the latest cause for concern on global energy costs, and the “timebomb” that many argue is ticking away for the UK and global economy. UK industry is already facing the highest electricity costs in the developed world, and the impact of this crisis (ongoing as I write despite assertions to the contrary) has only compounded that disadvantage because of both UK energy policy choices, and structural factors in operation of our energy market and infrastructure.
As if that wasn’t enough of a drag factor on competitiveness and growth, industry has also raised concerns around the implementation of some the mandatory policy charges designed to support UK energy strategy, and the impact this is having on both the predictability and level of power bills.
Examples cited include significant backdated charges for the Energy Intensive Industries (EII) and Nuclear Regulated Asset Base (RAB) levies where rates were not known at the time of setting a supply contract and have now arrived as an unwelcome surprise. The EII is a particular sore point as this mechanism is one where a scheme that helps industry (and therefore a good thing), is funded by the rest of industry already reeling from the fact that the UK is top of the table for power costs, and you can add to that the cases where the companies paying that levy are currently appealing the decision to exclude them from EII.
Meantime, the hopes for a fairly distributed British Industrial Competitive Scheme are tempered by it being planned for 2027 when it was needed last year. All considered, it’s not hard to see why optimism might take a significant knock.
The second significant concern raised has been the impact coming from the UK Government’s proposals to implement a UK steel trade measure that will limit tariff-free steel imports, based on the understandable objective of protecting domestic steel manufacture and retaining critical national infrastructure as a result.
These are aims that few who care about the health of UK engineering would fail to support, but as ever beware the unintended consequences from a policy that by its nature has to get down to very fine detail.
Materials impacted by the proposal are defined by their commodity code, and this identifies them as materials manufactured in the UK and therefore eligible for the measures applied. But what manufacturers are telling us is the list of commodity codes covered contain significant levels of products which theoretically could be produced in the UK, but for production and process reasons are not.
The effect is that imported materials which are the only realistic source for upstream production undergo price increases which make UK manufacturers uncompetitive against production elsewhere. At the same time, we are not really protecting UK production because we don’t actually manufacture these products.
Dig back into our survey and the sectors impacting optimism – fabricators, precision engineering and metal products – are those most impacted by this change. The UK imports around 70% of the steel we use, and all these products are value-added – and in the case of precision engineering high margin components – that add significantly to the UK’s economy and export performance.
There is still time to act to avoid industry’s concern turning into a reality. These changes do not come into force until the beginning of July, allowing the opportunity to press pause and carry out an objective review of which commodity codes are available on a consistent basis from UK production.
Moves by the UK Government to listen and act on these two issues would be more than welcomed by industry, and more importantly for a government whose aim is to grow our economy, can restore the optimism to match the positive change we have seen in demand in 2026.
Paul Sheerin
Chief Executive
Scottish Engineering
