May 2026 UK Sector Snippets

2026 opened with positive momentum, but recent geopolitical risks have clouded the outlook. 2025 GDP growth for the UK landed at 1.4%, with gains made in all areas barring automotive fuel (although Q4 was tough for Construction). The UK economy grew by 0.5% in the three months to February 2026, which was the strongest monthly expansion in two years; however, this was all before the outbreak of the conflict in the Middle East. Given that the situation is evolving on a daily basis, the assumptions in our sector commentary are subject to ongoing revision.

At present, there is a broad expectation that GDP growth will slow this year partly as a consequence of the conflict, with inflation likely to rise, further base rate reductions already on hold and impacts already being noted in terms of supply chains and consumer confidence. We continue to closely monitor the situation and impacts on various sectors.

Outlook: Agrifood remains under pressure from difficult market conditions, particularly elevated input costs, periods of weaker consumer confidence and the impact of weather on operating conditions. Even so, the sector continues to show resilience because demand is relatively consistent and the industry retains strategic importance. Consolidation is also shaping the market, with merger and acquisition activity carrying through from 2025 and creating more options for participants across the supply chain.

Kieron Franks, Sector Head for Agrifood, notes that while market conditions remain challenging, the sector's consistent demand profile and strategic role continue to underpin resilience, with consolidation activity also remaining notable. The Middle East conflict is currently increasing fuel costs, and specifically fertiliser costs, at a critical point in the year. We anticipate the cost and scarce availability of fertiliser will impact the later part of the year, with increased commodity costs resulting from reduced planting and lower yields. Invariably, commodity costs will rise and food inflation is expected to reach 6-7%.

For businesses, conditions remain manageable but not without pressure. Cost control and adaptability remain important, while consolidation may create greater scale or strategic flexibility for better-positioned operators.

Outlook: The sector entered 2026 with cautious optimism after a difficult 2025 marked by supply chain disruption, tariff uncertainty and plant restructuring. UK vehicle production fell 15.5% in 2025 to 764,715 units, although electrified vehicle output increased 8.3% to a record 41.7% share of national production. Demand is steadier, but affordability pressures and regulatory uncertainty are softening EV momentum. Margins remain under pressure from inflation in parts, logistics and raw materials, while investment in EV retooling and supply chain localisation is tightening liquidity for some businesses.

Nicole White, Sector Head for Automotive Manufacturers, reports that prior to the Middle East conflict, production had been expected to recover by 6.4% in 2026 to around 803,000 units, but businesses with weaker liquidity or heavier exposure to EV transition costs remain more vulnerable.

For businesses, the picture remains uncertain, further complicated by the Middle East conflict that will impact cost inflation and likely cause some supply chain disruption. The impact on oil prices could for some be an incentive to invest in EVs. Companies with stronger funding access and operational flexibility are better placed to absorb transition costs, while those facing higher compliance burdens or slower EV demand may remain under strain.

Outlook: Prior to the Middle East conflict, automotive suppliers had reported early signs of recovery after a difficult 2025, supported by improving trade conditions, firmer manufacturing activity and expected growth in vehicle output. The S&P Global UK Manufacturing PMI flash reading rose to 52.0 in February 2026 from 51.8 in January, but demand remains below pre-pandemic levels and consumer affordability issues continue to weigh on EV uptake. Persistent inflation in parts, raw materials and logistics are squeezing profitability, while longer lead times and uncertainty over consumer demand are increasing working-capital pressure. Liquidity is still available, but investment in EV retooling, battery localisation and supply chain sustainability is making conditions tighter.

Nicole White, Sector Head for Automotive Suppliers, highlights that despite an improving output at the beginning of the year, the recent Middle East conflict threatens this trend towards a more stable trade backdrop.  Weaker liquidity, high EV transition exposure and limited supply chain flexibility could still drive pressure through 2026.

For businesses, the operating environment remains demanding. The main pressure points are margin protection, working-capital management and the ability to adjust to slower-than-expected EV adoption.

Outlook: The chemicals sector is moving into an early and uneven recovery phase. Demand is improving gradually from the lows seen in 2024 and 2025, with more resilient support coming from pharmaceuticals, food, household products and sustainable packaging. However, construction-related chemicals and commodity petrochemicals continue to lag because of weak pricing power, high energy costs and global overcapacity. Liquidity remains adequate but tight, and while profitability is improving, it is still subdued. Regulatory and energy-related costs also continue to weigh on the sector.

Kieron Franks, Sector Head for Chemicals, indicates that the first few months of 2026 represented more of a turning point than a full recovery, with sustained improvement still dependent on energy competitiveness, regulatory clarity and a broader pickup in downstream demand. However, the Middle East conflict has reversed that recovery trend, significantly increasing energy costs and feedstock shortages. Manufacturers may have no option but to shut down and mothball production in the coming months if the conflict continues into the summer.

For businesses, resilience will vary by end-market exposure. Firms linked to defensive or higher-value applications are likely to remain better placed than those exposed to weaker construction demand or more commoditised product lines.

Outlook: The sector entered 2026 with renewed optimism, supported by more stable economic conditions, strong policy backing and continued private investment. AI adoption is accelerating, digital infrastructure continues to expand and cybersecurity remains a central priority as regulatory oversight increases. Talent shortages and cyber risk still present challenges, and the regulatory landscape is evolving across AI, data protection and competition. Industry consolidation is also reshaping telecoms, with larger-scale investment in networks and rural connectivity coming alongside closer scrutiny of market dynamics.

Chris Daker, Sector Head for Computers & Telecoms, points to the combination of policy support, innovation and infrastructure investment as key strengths, while noting that cyber threats, talent gaps and regulatory uncertainty remain important risks.

For businesses, the outlook remains positive where there is strong capability, investment and adaptability. Resilience will depend on managing compliance demands, protecting operations from cyber disruption and securing the skills needed to deliver growth.

Outlook: The S&P Global UK Construction PMI fell to 39.7 in April 2026, marking a 16th consecutive month of contraction and highlighting continued weakness in the sector. The decline reflects softer demand amid geopolitical uncertainty linked to the conflict in the Middle East, alongside rising energy costs. This has led to project delays, reduced tender activity and lower staffing levels. Cost pressures have also intensified, with input prices rising at the fastest pace since mid‑2022. According to the Construction Products Association (CPA) Spring Forecast 2026, the sector is now expected to contract by around 2.5% in 2026, reflecting weaker demand, rising costs and delayed project pipelines following the escalation of the Middle East conflict. Conditions are expected to remain challenging over the next 12–18 months, with demand declining and cost pressures increasing, particularly in the second half of the year.

Iveta Terefenkova, Sector Head for Construction, highlights that private housing is expected to be most affected, with output forecast to decline by c.7% in 2026, alongside a further 8% contraction in housing repair, maintenance and improvement, driven by affordability pressures, weak confidence and reduced discretionary spending. By contrast, infrastructure is expected to provide some resilience, with output forecast to grow by c.3.2% in 2026, supported by long-term investment in energy and water projects. (Source: Construction Products Association)

For businesses, near-term conditions are likely to remain difficult. The sector continues to face elevated insolvency levels, with approximately 3,900 construction firms becoming insolvent in the 12 months to February 2026, representing around 17% of all UK insolvencies. Insolvency levels remain high and are expected to persist in the near term.

Outlook: The sector has carried forward many of the pressures seen last year, but businesses have adapted and become more resilient in response. Greater use of AI and wider technology adoption are helping companies improve preparedness, particularly around supply chain disruption and pricing pressure. Access to funding remains available and demand is still supportive, which provides a degree of optimism. However, geopolitical uncertainty remains a standing risk and could affect performance again if disruption intensifies.

Chris Daker, Sector Head for Electronics, notes that the sector has learned from recent disruption and is responding through innovation, stronger preparation and continued investment, even though geopolitical risks remain a live concern.

For businesses, the key challenge is sustaining resilience while conditions remain unpredictable. Companies that can combine innovation with supply chain agility are likely to be better placed if external volatility returns.

Outlook: The UK remains exposed to energy shocks such as those brought by the Middle East conflict. The UK energy sector is nonetheless moving through a major transition, with demand growing steadily and policy increasingly focused on renewables, grid modernisation and decarbonisation. Investment conditions for renewable projects remain key and rely on government support and stronger incentive mechanisms. At the same time, margin pressure remains significant, especially for smaller suppliers and newer entrants, as infrastructure spending, decarbonisation costs and stricter capital requirements weigh on finances. Liquidity is also under pressure due to storage needs, elevated operating costs and ongoing exposure to imports and supply uncertainty linked to recent world events.

Nicole White, Sector Head for Energy, indicates that the sector's outlook remains volatile and exposed to price shocks. However, beyond the conflict we should remain cautiously optimistic, with stronger investment momentum in renewables and infrastructure, though success will still depend on financing access and the ability to navigate policy and regulatory change.

For businesses, the transition is creating both opportunity and strain. Scale, funding access and strategic flexibility will be important differentiators as policy support increases but compliance and capital requirements continue to rise.

Outlook: Household equipment remains closely tied to broader retail conditions and continues to be affected by cost-of-living pressure and weaker consumer confidence. Many customers are delaying purchases or switching to lower-cost products, which is weighing on demand for gifting and larger discretionary items. The sector is showing some resilience through replacement demand, home improvement activity and continued interest in energy-efficient and smart home devices. Even so, revenue is expected to contract and supply disruption alongside higher costs is likely to reduce profit margins.

Chris Daker, Sector Head for Household Equipment, points to the balance between subdued confidence and pockets of resilience, with replacement cycles and demand for energy-efficient products continuing to offer some support.

For businesses, demand conditions remain selective rather than broad-based. Pressure is likely to be greater for higher-ticket categories, while products linked to replacement need or efficiency may prove more resilient.

Outlook: The sector is stabilising but still weak overall. Demand is mixed, with manufacturing showing modest improvement while construction, an important end-market, remains challenging in the UK. Export demand, particularly for agricultural machinery, is also soft. Persistent input cost inflation and limited pricing power continue to weigh on profitability, with larger internationally exposed firms better positioned than smaller operators. Liquidity is tightening for SMEs as weak cash flow and high borrowing costs constrain investment, leaving capital spending focused mainly on automation and efficiency rather than expansion.

Nicole White, Sector Head for Machinery & Equipment, suggests that any recovery over the next year is likely to be modest and remains heavily exposed to construction demand and public investment.

For businesses, the operating backdrop remains cautious. Firms with stronger scale and export reach are better placed, while smaller suppliers may continue to feel pressure from softer cash generation and restricted investment capacity.

Outlook: Metals remains weak and underlying demand is still soft as construction contracts and manufacturing order books remain below normal. This means that any revenue improvement is more likely to come from rising commodity prices rather than stronger volumes. Profitability appears to have bottomed out but is still constrained by weak throughput, high energy costs (exacerbated by the Middle East conflict) and elevated financing expenses. Liquidity is being managed more tightly, yet working-capital strain, payment delays and insolvency risk remain present, especially for weaker operators.

Nicole White, Sector Head for Metals, highlights trade and regulation as the main swing factors, with the EU's CBAM now in force, the UK's CBAM confirmed January 2027 and proposed tighter EU steel import quotas increasing both policy support and uncertainty.

For businesses, the outlook remains guarded. Strategic importance is increasing, but so too are compliance demands, competitiveness pressures and sensitivity to any meaningful recovery in end-market demand.

Outlook: The paper sector continues to face declining demand, shaped by digital transformation, demographic shifts and weaker volumes from traditional print-related markets. Industry revenue is expected to dip by 2.4% in 2025-26 to £2.6 billion, while pressure is being compounded by strong price competition, rising import volumes and persistent overcapacity in global pulp markets. Although some input costs have eased, profitability remains low and energy costs continue to be a major constraint on competitiveness. Compliance burdens are also rising, including from packaging-related regulation, while confidence has weakened amid wage inflation and broader cost pressure.

Nicole White, Sector Head for Paper, notes that market volatility, import pressure, high energy costs and regulatory complexity are continuing to drive financial strain, with further failures and closures remaining a material risk.

For businesses, conditions are likely to stay challenging in traditional paper and print activities. Greater resilience appears in segments linked to packaging, digital print and higher-value specialist applications, but overall financial discipline remains essential.

Outlook: Pharmaceuticals remains one of the more resilient sectors, supported by stable NHS demand and strong balance sheets among larger branded manufacturers. However, conditions are less favourable for smaller generics producers and wholesalers, where high input costs, tighter financing and continuing supply chain disruption are creating pressure. Liquidity is becoming more divided across the market, with established firms holding solid cash positions while smaller businesses face rising stress and payment delays. The sector's strategic importance continues to strengthen, supported by government backing and technological progress.

Kieron Franks, Sector Head for Pharmaceuticals, indicates that resilience remains strongest among larger established operators, while smaller players continue to feel the effects of cost, financing and supply chain pressure. The Middle east conflict will have its impact either in availability of product and/or cost of transportation.

For businesses, overall conditions remain comparatively supportive, but not uniformly so. Scale, balance-sheet strength and operational resilience are likely to remain the key factors separating stronger performers from more exposed operators.

Outlook: Retail continues to operate in a difficult consumer and cost environment. The Autumn Budget offered limited relief for the sector, while employment regulation, employer cost increases and packaging-related charges are adding to the burden. Consumer confidence remains subdued, although household finances have improved somewhat for parts of the market as inflation has eased and wages have grown. Christmas trading was mixed, with larger chains generally performing better than gifting categories, while overall bricks-and-mortar footfall fell 2.2% in the five weeks to 28 December. Insolvencies remain a concern, particularly among businesses carrying high debt and limited room to absorb weaker demand or rising costs.

Chris Daker, Sector Head for Retail, points to a market where selective consumer resilience is being offset by structural cost pressures, softer traffic and continued stress among more heavily indebted operators.

For businesses, the environment remains highly competitive and uneven. Better-positioned operators may still capture spending, but cost escalation and fragile demand mean vulnerability remains high for businesses with weak margins or restricted flexibility.

Outlook: Software and IT services continues to show solid fundamentals, underpinned by strong demand and stable profitability for well-positioned businesses. Recurring revenue models, ongoing digital transformation needs, supportive regulation and continued investor interest are all helping to sustain a positive backdrop. While insolvency pressures in the wider economy and higher workforce costs remain relevant challenges, the sector's structural strengths are supporting resilience as 2026 begins.

Chris Daker, Sector Head for Software & IT Services, indicates that the combination of recurring income, regulatory tailwinds and sustained technology demand is helping to maintain a positive and resilient outlook for the sector.

For businesses, the main picture is one of continued opportunity supported by long-term demand drivers. Pressure points remain around staffing costs and execution, but the sector appears better insulated than many others from broader economic weakness.

Outlook: Textiles remains in a challenging position, with soft demand across apparel, footwear and wholesale as retailers continue to destock and protect margins. Home textiles are holding up slightly better, but growth remains modest. Input costs stay elevated, with structurally high energy prices and wage inflation for skilled labour placing ongoing pressure on margins. Although producers are attempting to pass through some cost increases, pricing power is limited for smaller players. Insolvency activity remains elevated, and working-capital risk is visible in tighter inventories, shorter order visibility and dependence on a small number of large customers.

Chris Daker, Sector Head for Textiles, highlights that resilience is emerging mainly in niche areas such as technical textiles, home textiles and contract manufacturing, where export exposure and higher value-add can provide better protection.

For businesses, conditions remain difficult in more fashion-led and lower-margin activities. Stronger diversity, pricing power and customer spread are becoming increasingly important in separating stable operators from more exposed ones.

Outlook: Transport continues to face headwinds, particularly labour shortages and regulatory requirements linked to decarbonisation and greener operations. Freight demand has remained resilient, supported mainly by e-commerce and helped by moderating inflationary pressure. Passenger transport is showing a steadier recovery across rail and bus services, with investment and the shift from diesel and petrol to electric fleets supporting progress in the bus segment. Rail is also entering a period of structural change as the government moves towards nationalisation of operators as contracts expire.

Kieron Franks, Sector Head for Transport, notes that demand has held up relatively well, but the impact of greener operating requirements and rail reform will need close observation as the policy transition progresses. The immediate impact of the Middle East conflict has been a surge in fuel prices, raising the cost of transported goods. Alternative routing of imports is adding to both cost and delivery times and specifically impacts perishable products. Air transport has seen a significant disruption with routes rescheduled and rerouted to avoid the area. Looking into the busy summer period, prolongation may well lead to shortages of jet fuel, curtailing travel and holidays.

For businesses, current conditions present a mix of resilience and transition risk. Demand support is helpful, but labour availability, compliance requirements and policy change will continue to shape near-term operating pressure.

Outlook: Transport equipment entered 2026 in gradual stabilisation after a volatile 2025, although performance varies across aerospace, rail, maritime and wider manufacturing. Demand is improving overall, supported by aerospace and defence order books and export-led rail activity.  Even so, high energy costs, elevated financing conditions and the cost of industrial transition continue to weigh on parts of the market. Profitability is mixed, with stronger contract stability in aerospace and defence offset by tighter margins elsewhere. Liquidity remains generally adequate but is becoming tighter for smaller manufacturers as capital spending on decarbonisation, electrification and modernisation absorbs cash flow.

Nicole White, Sector Head for Transport equipment, highlights that improving export demand and aerospace expansion are supporting momentum, but firms with weaker balance sheets or less operational flexibility remain exposed as investment and compliance demands rise.

For businesses, the outlook is improving but still selective. Operators linked to stronger export markets and long-term investment themes appear better placed, while those facing higher borrowing costs or heavier transition requirements may continue to face pressure.

For more information, visit our global sector research hub.