British Equities Flat as Manufacturing Slump Continues; Lloyds Takes Provisions Hit

The UK’s manufacturing sector has entered a prolonged downturn, with the latest Purchasing Managers’ Index (PMI) data underscoring a deepening contraction in Q1 2025. Meanwhile, Lloyds Banking Group’s increased provisions for credit risks—driven by macroeconomic uncertainty and U.S. tariff policies—highlight the ripple effects of global trade tensions on British equities. Investors remain cautious, as flat stock performance reflects sector-specific headwinds and banking sector adjustments.

Manufacturing’s Persistent Slump

The UK manufacturing sector has been in decline for seven consecutive months, with the S&P Global PMI falling to a 17-month low of 44.9 in March 2025, before a slight improvement to 45.4 in April (still below the critical 50.0 threshold). Key drivers of the downturn include:
- Weak demand: New orders contracted at the fastest pace in over five years, with export orders declining for the 38th consecutive month. Weakness in U.S., European, and Chinese markets, compounded by fears of U.S. tariffs, has stifled global sales.
- Cost pressures: Input prices surged to a 28-month high in April, driven by rising energy costs, raw material inflation, and domestic policy changes like minimum wage hikes. Output price inflation hit a 26-month peak as firms passed costs to consumers.
- Policy and geopolitical risks: Manufacturers cited uncertainty over U.S. trade policies, the Red Sea crisis disrupting supply chains, and the UK’s delayed Industrial Strategy as key challenges.

The Make UK and BDO Manufacturing Outlook report revised 2025 growth forecasts to a contraction of -0.5%, marking the sector’s worst first-quarter performance since 2015.

Lloyds’ Elevated Provisions: Navigating Uncertainty

Lloyds Banking Group reported a £309 million impairment charge in Q1 2025, a stark increase from £57 million in Q1 2024, as the bank prepares for downside risks. The jump reflects:
- U.S. tariff impacts: A £100 million central adjustment was allocated to mitigate risks from U.S. trade policies, which disrupted economic models.
- Sector-specific risks: £204 million was allocated to retail lending, including mortgages and unsecured loans, amid slowing consumer demand.
- Economic outlook adjustments: £35 million addressed uncertainties from global trade shifts and domestic cost pressures.

Despite these provisions, Lloyds reaffirmed its 2025 targets:
- Net interest income of £13.5 billion, supported by a 3.03% net interest margin.
- Operating costs capped at £9.7 billion, factoring in severance costs and inflation.
- CET1 ratio maintained above 13.0%, with capital generation of ~175 basis points.

However, profit after tax dipped 7% year-on-year to £1.13 billion, reflecting elevated costs. The bank also faces lingering risks from the Supreme Court’s pending ruling on the Wrench, Johnson, and Hopcraft case, which could influence redress obligations tied to car loan mis-selling.

Investor Implications: Caution Amid Mixed Signals

The flat performance of British equities—particularly in banking and industrials—reflects investor skepticism about the UK’s economic trajectory. Key concerns include:
1. Manufacturing’s drag on GDP: A -0.5% contraction in manufacturing could shave 0.1-0.2% from overall GDP growth in 2025.
2. Banking sector resilience: Lloyds’ provisions highlight the vulnerability of retail lending portfolios to macroeconomic shocks, though its CET1 ratio remains robust.
3. Policy uncertainty: Delays in the UK’s Industrial Strategy and unresolved trade disputes with the U.S. deter long-term investment.

Conclusion: Navigating the Crosswinds

The UK equity market’s stagnation is justified given the manufacturing sector’s deepening slump and Lloyds’ credit risk adjustments. Key data points underscore the challenges:
- Manufacturing PMI: The sector’s April PMI of 45.4 remains in contraction, with export orders declining at the fastest pace in five years.
- Lloyds’ financials: While the bank’s CET1 ratio holds at 13.5%, its 2025 impairment charges reflect a £252 million increase in provisions year-on-year.
- Economic forecasts: Make UK’s revised -0.5% growth forecast for manufacturing and Lloyds’ 12.6% Q1 RoTE (below its 13.5% target) signal caution.

Investors should prioritize defensive sectors and banks with strong capital buffers. For manufacturing, a rebound hinges on trade policy clarity and cost stabilization—outcomes that remain uncertain in 2025. Until then, British equities are likely to remain range-bound, balancing Lloyds’ resilience against the sector’s ongoing struggles.

This analysis synthesizes macroeconomic trends and corporate disclosures to provide a data-driven assessment of risks and opportunities in UK equities.