Clouds gather above UK manufacturing sector

UK manufacturing activity dropped in the quarter to July 2019, but firms expect a slight recovery in the next few months, according to the latest quarterly Industrial Trends Survey by the Confederation of British Industry (CBI).

The survey of 291 manufacturing firms showed that optimism fell at the fastest pace since July 2016 – just after the EU referendum – and investment spending plans weakened again.

New orders declined sharply in the quarter to July: both new domestic and new export orders fell at their fastest respective paces since the financial crisis. And overall order books were below “normal” to the greatest extent since 2010. Meanwhile, export optimism declined at a brisk pace.

Manufacturers continued to grow their stocks of raw materials and finished goods, but at a slower pace than in the three months to April, when stocks were increased at the fastest pace on record. Firms expect their stocks of finished goods to fall a little over the quarter ahead, but stocks of raw materials and work in progress are expected to remain stable.

Sector hit by double-blow

CBI Chief Economist Rain Newton-Smith commented: “As the tailwind from stockpiling weakens, clouds are gathering above the manufacturing sector. It’s being hit by the double-blow of Brexit uncertainty and slower global growth.

“With orders, employment, investment, output and business optimism all deteriorating among manufacturers, it’s crucial for the new Prime Minister to secure a Brexit deal ahead of the October deadline. And get on with pressing domestic priorities, from improving our infrastructure to fixing the apprenticeship levy.

“This will allow firms to focus on investing in new technology and tackling the skill shortages that plague this sector.”

Next PM must put an end to the deadlock

Tom Crotty, Group Director of INEOS and Chair of CBI Manufacturing Council, said: “With activity contracting, sentiment deteriorating, and key investment decisions on hold, there can be no clearer evidence of how much Brexit uncertainty is continuing to hold back the UK’s manufacturing sector.

“It is critical that the next Prime Minister puts an end to the deadlock so that manufacturers have the certainty needed to invest in their growth and productivity.”

Investment intentions for the year ahead deteriorated compared with last quarter, with firms expecting to spend less on both tangible and intangible investments. In addition, headcount dropped in the quarter to July at their fastest rate since April 2010. However, firms expect employment to pick up again next quarter.

Although pre-Brexit stockpiling boosted growth in Q1, the underlying momentum of the UK economy is expected to remain modest (contingent on a Brexit deal being ratified by October, which remains the major risk to the UK economic outlook). Meanwhile, global growth is expected to slow as trade tensions continue to erode world trade flows. For more information, see the CBI’s July 2019 economic forecast.

Key findings from the survey

  • 10% of firms said they were more optimistic about the general business situation than three months ago and 42% were less optimistic, giving a balance of -32%. Optimism about export prospects for the year ahead (-29%) worsened compared with last quarter (-21%).
  • 19% of firms said the volume of output over the past three months was up and 30% said it was down, giving a balance of -11%.
  • 24% of businesses reported a rise in new orders, and 38% reported a decrease, giving a rounded balance of -15% compared with +5% in the three months to April. Domestic orders dropped (-19% from +4% in April), and export orders fell (-28% from -3% in April), both at their respective quickest paces since the financial crisis.
  • Stocks of raw materials (+10% from +39% in April) and finished goods (+14% from +25% in April) grew at a noticeably slower pace in the three months to July, while stocks of work in progress were roughly flat, following record acceleration last quarter in all three categories.
  • 19% of manufacturers said employee numbers were up in the quarter to July, while 27% said they were down, giving a balance of -8% (from +9% in April).
  • Growth in average unit costs (+15%) in the quarter to July grew at their slowest rate since July 2016.
  • Average domestic prices in the three months to July (-2% from +11% in April) were broadly flat.
  • Average export prices fell (-15% from +3% in the three months to April) at their fastest rate since January 2016.
  • The proportion of firms working below capacity (59%) was at its highest since April 2013.

Key findings – looking ahead

  • Output volumes in the next three months are expected to recover slightly (+6%).
  • New orders over the next three months are expected to pick up again (+10%), with domestic orders (+3%) being broadly flat and export orders (+9%) growing at an above-average pace.
  • The proportion of firms citing political/economic conditions abroad as a factor likely to limit export orders in the next three months (27%) declined noticeably from last quarter (54%).
  • Stocks of raw materials (+2%) and work in progress (-2%) are expected to be broadly flat in the next three months, while stocks of finished goods (-13%) are expected to fall.
  • Employee numbers are expected to pick up again in the next three months (+16%).
  • Average unit costs are expected to grow at a slower rate next quarter (+9%).
  • Domestic price inflation (+12%) is expected to accelerate next quarter, while export prices (+21%) are expected to pick up sharply.
  • Planned spending on plant and machinery (-17% from -14% in January) and buildings (-26% from -18% in January) for the year ahead remains negative.
  • Meanwhile, manufacturers expect investment in training and retraining and in product and process innovation in the year ahead to also deteriorate (-11% from +2% and -4% from +2%, respectively, in the previous quarter).
  • The factor most cited as likely to limit investment plans in the year ahead was demand uncertainty (64%), with concerns at their most elevated since the financial crisis. Meanwhile, concerns over labour shortages remained heightened (25%).

Need advice for preparing for a possible no-deal Brexit? Email me or call me on 020 7099 2621.