Scottish engineering recovery gathers pace but rising costs threaten to choke growth

But industry leaders are warning that rising costs, policy uncertainty and pressure on margins risk derailing that recovery before it becomes sustained growth.

Paul Sheerin, chief executive of Scottish Engineering, said businesses were seeing genuine increases in activity, but many were struggling to convert that into stronger financial performance as energy, materials and transport costs continued to bite.

“Companies are definitely busier,” he said.

“There’s more demand on them. But not all of them are having fun with that.

“They’ve won work, some of which was from a long-term pipeline, but margins are now getting squeezed again because energy costs have moved, materials costs remain high and logistics costs continue to create pressure.”

The latest Scottish Engineering quarterly survey provided a fresh snapshot of sentiment across the sector.

The previous quarter marked a notable improvement, with sharp swings in orders, output and optimism helping to lift confidence after a prolonged weaker spell.

But while activity has improved, Paul suggested the wider operating environment remained fragile.

“If I have a concern, it’s that these general economic conditions could flatten us again in the back half of the year,” he said.

“That would be the risk.”

The strongest performers continue to be businesses with differentiated products and clear export strategies.

Paul pointed to firms developing specialist systems and advanced engineered products that are finding success internationally, even where UK demand remains limited.

But he warned that broader competitiveness pressures remain.

Scottish Engineering has raised concerns over industrial energy costs, wage inflation and proposed steel tariff measures, which it believes risk increasing costs for manufacturers already competing in tough international markets.

“It feels like the UK has an imbalance in it,” Paul said.

“We have built our engineering reputation on export, but exports have suffered in recent years.

“Anything that makes us less competitive against the nations we are competing with becomes a real concern.”

There are also signs that some engineering capability built around the North Sea is increasingly being redirected overseas rather than deployed domestically.

A number of manufacturers serving oil and gas customers have adapted by pivoting to international markets, including Norway, South America and Africa, using the same technical expertise developed in Scotland.

“The number of companies I meet who say what they used to do in the North Sea they are now still doing, but shipping to Norway or elsewhere around the world, is significant,” Paul said.

“That capability is still here, but what we want to avoidis exporting the expertise rather than the products. That would be a real concern.”

Defence remains one area of clear opportunity.

Scottish firms are already involved in major programmes including the Type 26 and Type 31 frigate projects, while further supply chain opportunities could emerge if future defence spending plans become clearer.

Paul said visibility would be critical.

“One thing that really helps confidence is demand,” he said.

“Clarity around those programmes and what they actually mean for the supply chain would make a real difference.”

Longer-term concerns remain around skills and workforce renewal.

Engineering apprenticeship numbers recovered strongly after Covid, but Paul said momentum had begun to slow as employers faced tougher financial conditions.

Starting apprentices remained a long-term investment that some businesses were becoming more cautious about committing to.

“We have a demographic challenge around retirement and we need to do more,” he said.

“But businesses under financial pressure naturally become more cautious.”

Automation and AI are becoming more prominent, with companies increasingly exploring how digital tools can improve efficiency and reduce pressure on stretched teams.

For now, however, the bigger immediate challenge remains converting stronger demand into sustainable profitability.

Scottish Engineering’s message is that recovery is under way.

But whether it becomes durable growth may depend less on demand returning and more on whether the operating environment allows manufacturers to compete.

LeadBody