Key Takeaways

The UK manufacturing sector ended 2025 on a positive, albeit slightly softer, note. The final S&P Global/CIPS UK Manufacturing PMI for December was revised down to 50.6 from the preliminary 'flash' estimate of 51.2. Despite the downward revision, the reading marks a meaningful improvement from November's 50.2 and represents a 15-month high. The sector remained in expansion territory (above the 50.0 neutral mark) for the third consecutive month, driven by rising output and a tentative recovery in new orders. However, the report also highlighted a concerning return of price pressures and lingering questions about the sustainability of the recovery as temporary supportive factors fade.

Dissecting the December 2025 Manufacturing PMI Report

The headline figure of 50.6, while revised lower, confirms the sector's ongoing recovery. This marks the third straight month of expansion, a sequence not seen since early 2024. The underlying components provide a nuanced picture of the sector's health at the close of the year.

The Good: Output and Orders on the Rise

The core of the expansion was a continued increase in production volumes. Output rose for the third month running, supported by two key factors:

  • Domestic Demand: The UK domestic market remained the primary engine of growth, a consistent theme throughout the latter part of 2025.
  • Stabilizing Export Orders: In a significant development, the decline in new export business showed clear signs of bottoming out. While exports have now fallen for nearly four years, the rate of contraction slowed markedly in December, taking a "sizeable stride towards stabilising," as noted by S&P Global. This suggests weakening external headwinds.

Furthermore, manufacturers benefited from a reduction in specific, temporary headwinds that had plagued the sector. The negative impacts from uncertainty surrounding the Autumn Budget, ongoing tariff discussions, and the disruptive JLR cyber-attack all moderated, providing a clearer runway for operational activity.

The Concerning: Resurgent Price Pressures

Not all developments were positive for the broader economic outlook. The report signaled a reacceleration of inflation within the manufacturing supply chain:

  • Input Cost Inflation Accelerated: The rate of increase in prices paid for raw materials and other inputs picked up pace in December.
  • Output Charges Rose: Crucially, manufacturers passed these higher costs on to their customers. Output prices increased after a decline in November, breaking a disinflationary trend and potentially signaling pipeline inflationary pressures for the wider economy.

The Uncertain: Business Confidence Wanes

Perhaps the most forward-looking and cautionary signal was a dip in business optimism. Confidence among manufacturers fell for the first time in three months, reflecting anxiety about whether the current growth can be sustained. This uncertainty underscores a critical weakness in the recovery: its drivers may be temporary.

What This Means for Traders

This PMI report presents a mixed bag for traders across asset classes, requiring a calibrated approach.

For FX (GBP) Traders:

The data creates a tension between growth and inflation narratives for the Pound Sterling (GBP).

  • Growth Support: The confirmed expansion and 15-month high are modestly GBP-positive, suggesting underlying economic resilience.
  • Inflation Concern: The resurgence in both input and output price inflation is the standout for the Bank of England (BoE). This could temper expectations for aggressive interest rate cuts in 2026. Traders should monitor market-implied probabilities for BoE policy moves; any scaling back of rate cut bets could provide short-term support for GBP.
  • Trading Implication: Expect GBP to exhibit sensitivity to upcoming inflation data. Strong CPI prints will gain greater significance if they confirm the price pressures hinted at in this PMI. The Pound may find itself in a tug-of-war between decent activity data and sticky inflation.

For Equity Traders (FTSE 350):

The implications for UK-listed industrial and manufacturing stocks are twofold.

  • Sectoral Tailwind: The sustained expansion is a fundamental positive for industrial sector earnings. Companies benefiting from strong domestic order books may see analyst upgrades.
  • Margin Watch: The acceleration in input costs is a clear risk to profit margins. Traders should scrutinize upcoming company earnings calls for management commentary on cost pass-through ability. Firms with strong pricing power are better positioned.
  • Broader Market Impact: The return of price pressures may weigh on the valuation of longer-duration growth stocks, as it supports a "higher-for-longer" interest rate narrative.

For Bond Traders (Gilts):

The report leans slightly bearish for UK government bonds (Gilts).

  • The inflation components will be of primary concern to the Debt Management Office (DMO) and bond vigilantes. It reinforces the narrative that the "last mile" of inflation fighting may be difficult, potentially leading to a steeper yield curve as long-term inflation expectations edge up.
  • The growth component reduces the perceived probability of a severe recession, limiting the safe-haven bid for bonds. Traders might consider strategies that benefit from a mild bear steepener in the Gilt yield curve.

The Road Ahead for UK Manufacturing in 2026

As S&P Global astutely highlights, the start of 2026 will be a critical test. The current expansion rests partly on the fading of negative one-off factors (budget uncertainty, cyber-attack) and activities like inventory building and backlog clearance. For growth to become entrenched, the base must shift towards genuine, sustained increases in consumer and business demand.

The December interest rate cut by the Bank of England is hoped to be a catalyst in this transition, lowering the cost of capital to encourage investment and spending. However, the dip in business optimism reveals deep-seated caution. Manufacturers are not yet convinced that a robust demand-led cycle is beginning.

In conclusion, the UK manufacturing sector enters 2026 with cautious momentum. The December PMI confirms a recovery is underway but exposes its fragile underpinnings and an unwelcome companion in rising prices. For policymakers at the BoE, this report complicates the picture, highlighting the delicate balance between supporting growth and ensuring inflation's defeat is permanent. For traders, it sets the stage for a year where data dependency will be paramount, with every inflation and industrial production release carrying added weight to determine if this manufacturing rebound is the real deal or merely a temporary respite.