The number of manufacturers going into administration has fallen by 20% in the first half of 2007, but analysts warn that it does not necessarily indicate a sustained upturn in the industry.

In the first half of this year, 297 manufacturing businesses went into administration compared to 371 in the same period of 2006, according to figures analysed by Deloitte.

This is indicative of a sector on the up in the UK. For example, The Royal Bank of Scotland economist Julien Seetharamdoo reported that activity increased sharply in the manufacturing sector in the West Midlands in July.

However, Lee Manning, a re-organisation services partner at Deloitte, said this uptick may be coming to an end. “Over the last couple of years we have seen so much liquidity chasing a scarcity of quality deals,” he said. “This is now changing, and with interest rates rising we will see an acceleration in the rate of companies going into administration as more marginal investments begin to buckle.”

Manning added that the figures do not reflect the current state of the market. “We [Deloitte] are seeing more work dealing with troubled companies, which were acquired from earlier failed enterprises and which are now beginning to fail again with increasing momentum.”

With banks becoming more cautious about lending money and interest rate rises beginning to bite, Manning said Deloitte has seen a marked increase in the rate of business reviews the firm is being asked to undertake.

Dominic Wong, a manufacturing re-organisation services partner at Deloitte, is also increasingly pessimistic about the prospects for the coming months in the sector. “UK manufacturing continues to perform strongly this year but there are a number of indicators that more difficult times may lie ahead,” he said. “The cost of raw materials remains an issue for manufacturers and combined with the rising interest rates and continuing high energy costs, we have an environment which is likely to result in an increase in instances of financial distress going forward.”