Manufacturing weakens as Brexit uncertainty bites - CBI

Manufacturing new orders fell at the fastest pace in three years in the quarter to October, reflecting falls in both domestic and export orders, according to the latest quarterly CBI Industrial Trends Survey.

The survey of 354 manufacturers showed that output growth was stable at an above-average pace in the three months to October relative to the quarter to September. But output growth is expected to stall in the three months to January 2019 – marking the weakest expectations in around three years. Total new orders are also set to fall a little further in the quarter ahead.

Business optimism tumbled at the fastest pace since the UK’s vote to leave the EU, while optimism about export prospects for the year ahead fell at the fastest pace since the Eurozone crisis. Meanwhile, concerns that political and economic conditions were likely to limit export orders over the next three months were the highest since immediately after the EU Referendum.

Investment intentions for the year ahead deteriorated significantly in the three months to October, with spending on buildings, training and innovation expected to be cut back in the year ahead. Capital expenditure on plant and machinery is set to be reduced at the fastest pace since July 2009.

Skills shortages are also biting, with concerns that access to workers is likely to constrain investment over the year ahead remaining at a survey high. Meanwhile, fears that access to skilled labour is likely to limit output over the quarter ahead rose to the highest in over forty years.

Looking more broadly at the UK economy, services growth is holding up but overall growth is expected to remain subdued, reflecting weak household income growth and the drag on investment from Brexit uncertainty

Rain Newton-Smith, CBI Chief Economist, said:

“This is a sobering set of figures demanding immediate action at home and abroad.

“Planned investment is being scaled back in the face of deepening Brexit uncertainty, so it’s vital that the Chancellor incentivises manufacturers to spend in areas that will help them become more productive. Using the upcoming Budget to increase the Annual Investment Allowance, alongside a wider review, could help the UK become more competitive with its global peers.

“Combined with meaningful business rates reform, these steps can help the UK economy to make the advances in digital and new technologies envisaged in the Industrial Strategy.

“Aside from much-need progress on domestic policy, the Government’s number one priority on Brexit must be securing the Withdrawal Agreement, ushering in a much-needed transition period that will give businesses the breathing space they need.

“Protecting jobs and people’s livelihoods from a lost generation of investment remains urgent.”

Tom Crotty, Group Director of INEOS and Chair of CBI Manufacturing Council, said:

“These figures are concerning and must not be taken lightly. Ongoing uncertainty around Brexit has made for a particularly tough quarter for the UK’s manufacturers. It is not surprising that many firms have recently moved publicly from contingency planning to action as the likelihood of a ‘no deal’ Brexit increases.

“Manufacturers will also be deeply concerned with the Government’s proposals for a post-Brexit immigration system, which, by dismissing the importance of low-skilled labour to the economy, risks worsening skills shortages.

“Manufacturers’ main priority for the coming months will continue to be for the Government to protect frictionless trade with the EU after Brexit. The Autumn Budget also presents an excellent opportunity for the Chancellor to give the sector a welcome shot of optimism.”

Key findings:

• 10% of firms said they were more optimistic about the general business situation than three months ago and 25% were less optimistic, giving a rounded balance of -16%, the fastest decline since July 2016. Optimism about export prospects for the year ahead deteriorated at the fastest pace since 2012 (-15% down from -2% in July).
• 27% of firms said the volume of output over the past three months was up and 14% said it was down, giving a balance of +13%, up from +11% in the quarter to September.
• 21% of businesses reported an increase in new orders, and 28% reported a decrease, giving a rounded balance of -6%, the weakest balance since October 2015. Domestic orders (-10%) and export orders both fell (-8%), a weaker reading than in the previous quarter (+8% and +21% respectively).
• 26% of manufacturers said employee numbers were up, and 18% said they were down, giving a balance of +7%, marking a slowdown in growth from the previous quarter (+17%) though above the long-run average (-7%).
• Growth in average unit costs (+30%) decelerated slightly compared with the previous quarter (+36%), but remained well above the long run average (+12%).
• Growth in average domestic prices slowed to +6% (from +20% in the three months to July), but remained above the long run average (-1%).
• Growth in average export prices eased (+3%, from +12%) to the slowest since October 2016.

Key findings – looking ahead:

• ​Output growth is expected to stall over the coming three months (-3%) – the weakest expectation since December 2015.
• New orders over the next three months are expected to fall slightly further (-4%), driven by domestic orders (-7%), while export orders are expected to grow slightly (+4%).
• Employee numbers are expected to decline at a similarly modest pace over the quarter ahead (-6%) – the weakest expectation in two years.
• Unit cost growth is expected to moderate further next quarter (+26%).
• Domestic price inflation is expected to pick up next quarter (+10%).
• Export price inflation is expected to remain at a similar level next quarter (+5%).
• The proportion of participants indicating concern that skilled labour was likely to limit output over the next three months (30%) increased compared to the previous quarter (23%) to the highest since 1974. The proportion concerned that materials/components were likely to constrain output (18%) reached the highest since April 2012. Orders or sales remains the factor cited as most likely to limit output overall (58%).
• Planned spending on plant & machinery is expected to be cut back at the fastest pace since July 2009 over the year ahead (-19%, from +4% in the three months to July). Investment plans for buildings for the year ahead also fell further below the negative long-run average (-30%, compared to -14% last quarter).
• Manufacturers expect to continue to reduce training expenditure in the year ahead (-10% from -20%) and expect to continue cutting spending on product and process innovation in the year ahead (-6% from -11%).
• ​The factor most cited as likely to limit capital spending in the year ahead remains demand uncertainty (50% of firms), while concerns over labour shortages remain the highest on record (20% of firms).