UK manufacturing prospects muted after Brexit – CBI survey

The UK’s manufacturing output and domestic orders saw firm growth over the past quarter, but both are expected to slow over the next three months. That’s according to the latest quarterly Industrial Trends Survey by the Confederation of British Industry (CBI).

Following a slowdown in activity towards the end of 2015, which spilled over into the first half of this year, the survey of 506 manufacturers shows that the sector had a decent recovery over the three months to July. Output rose at its fastest in two years, while domestic orders and employment also improved. Export orders were flat, but improved on the fall seen in the previous quarterly survey.

Despite this improvement in activity, optimism about the business situation over the past quarter fell at the fastest pace since January 2009, in the aftermath of the referendum result. Meanwhile, the outlook for the next three months is set to soften, with expectations for total new orders growth at their lowest since January 2012, output growth set to ease, and headcount expected to fall slightly.

Export orders set to rise at an above-average pace

Looking ahead to the coming quarter, concerns over economic and political conditions abroad as a constraint on exports orders are at their highest level since 1983. Yet, competitiveness in international markets has improved at the strongest pace in over six years, with a further boost expected next quarter. As a result, export orders are set to rise at an above-average pace over the next quarter.

Investment is also expected to be lower over the coming year compared with the last 12 months, with planned capital expenditure on buildings and plant & machinery easing from the multi-decade highs seen in the previous survey. Nevertheless, both were still broadly in line with average levels.

Cloud of uncertainty post-Brexit

CBI Chief Economist Rain Newton-Smith commented: “Manufacturers picked up the pace over the second quarter, with output growing solidly. We’re also seeing encouraging signs of a boost to export competitiveness from a weaker sterling.

“But it’s clear that a cloud of uncertainty is hovering over industry, post-Brexit. We see this in weak expectations for new orders, a sharp fall in optimism and a scaling back of investment plans.

“So, it’s important now for the new Government to steady the ship with a plan, and a clear timetable, for negotiating the UK’s relationship with the EU. This, along with a renewed focus on industrial strategy, will help give firms the confidence they need to grow and create jobs.

“Manufacturers look forward to working with the new Government to preserve the openness of the UK’s economy to markets, skills and trade.”

Key findings – past quarter

  • 30% of firms said the volume of output over the past three months was up and 14% said it was down, giving a balance of +16%. This brought the pace of growth to levels last seen two years previously (+23% in July 2014).
  • 32% of businesses reported an increase in total orders, and 23% a decrease, giving a balance of +9%, the highest since July 2015 (+9%).
  • The balance for new domestic orders (+11%) rose to its highest since July 2015 (+12%).
  • Export orders were broadly flat (-2%) following a slight fall in the last quarter’s (-7%).
  • 27% of manufacturers said employment numbers were up, and 18% said they were down, giving a rounded balance of +8%. This was above the long-run average (-9%) and the highest since July 2015 (+10%).
  • 5% of firms said they were more optimistic about the general business situation than three months ago, but 52% said they were less optimistic, giving a balance of -47%. This was the lowest figure since January 2009 (-64%). Optimism about export prospects for the year ahead also fell (-11%).
  • Average domestic prices (+9%) rose at their fastest since July 2011, while average export prices were flat (+3%). However, the survey balance was the highest since April 2012 (+4%).
  • Manufacturers’ investment intentions compared with the previous 12 months deteriorated, both for buildings (-23%, from +6% in April) and plant & machinery (-5%, from +17% in April). Plans for spending on training & retraining remained positive (+16%, from +19% in the previous quarter).
  • The number of firms citing political/economic conditions abroad as a constraint on export orders in the coming three months rose to a 33-year high (+53%). This was the highest since January 1983 (+54%).
  • Competitiveness in the EU (+6%) improved at the fastest since April 2010 (+16%). It also rose in non-EU markets (+12%).

Key findings – next quarter

  • Total new orders are expected to be flat (0%), the lowest balance since January 2012 (-2%). Domestic orders are also expected to be broadly flat (+1%).
  • A balance of +10% of respondents expect export orders to rise (21% expect an increase, and 11% a fall).
  • 19% anticipate a rise in output volumes, and 12% a fall, giving a rounded balance of +6%.
  • 14% expect employment to increase, and 20% expect it to decline, giving a balance of -6%.

Separately, the CBI published monthly figures for July, which showed that output growth improved slightly (+16%). This was the highest since February (+17%). Total order books were broadly the same as in June (-4%, from -2% in June), but export order books deteriorated (-22%, from -14% in June).

Are you worried about how Brexit will affect your company’s performance? To discuss your concerns and the best way to deal with them, email me or call me on 020 7099 2621.