Output volumes fall as cost pressures strengthen - CBI Industrial Trends Survey

Sentiment across the manufacturing sector fell at the fastest pace in over two years in January, according to the Confederation of British Industry’s (CBI) latest quarterly Industrial Trends Survey. Manufacturing output volumes fell over the quarter to January, though less sharply than in the quarter to December. Output is expected to fall further in the three months to April.

The volume of total new orders decreased in the quarter to January, reflecting steep declines in both domestic and export orders, with the latter falling at the fastest pace since July 2020. Over the next three months, manufacturers expect the volume of total new orders to fall at the fastest pace since the onset of the COVID pandemic in April 2020, with 79% of respondents citing the condition of order books as a factor likely to limit output over the next quarter (the highest share since July 2020).

Manufacturers reported increased cost pressures: growth in average costs accelerated in the quarter to January, compared with October, while expectations for growth in costs in the three months ahead rose to their strongest in over two years. Domestic and export selling price inflation was muted in the three months to January, but both are expected to rise rapidly in the three months to April.

Investment intentions for the year ahead have deteriorated markedly across all categories. Manufacturers expect to reduce spending on buildings, plant & machinery, product & process innovation (which saw the weakest balance since 2009), and on training & retraining. Manufacturers cited uncertainty about demand, inadequate net returns and access to internal finance as key factors constraining investment.

The outlook for hiring has also weakened. Manufacturing headcount fell slightly in the quarter to January, and manufacturers expect numbers to fall again in the quarter to April, and at the fastest pace since July 2020.

Ben Jones, Lead Economist, CBI, said:

“Manufacturers have entered the New Year in a grim mood. Confidence has evaporated over the last three months as orders have dropped.

“A fall in domestic deliveries comes amid widespread concerns over the impact of the increase in National Insurance contributions, minimum wages and changes to employment law on firms’ operating costs. And a strong focus on managing operational expenditure is leading manufacturers to cut back their investment and hiring plans.

“Meanwhile, export prospects appear worse than at any time since the pandemic, reflecting a slowdown in overseas demand and reports of ongoing difficulties securing supply contracts with customers based in the EU.

“In comments to the survey, several firms noted concern that negative sentiment risks becoming self-fulfilling. The government can play a role in re-booting confidence by sending clear signals of intent on policies that could support the manufacturing sector, notably delivering an industrial strategy that helps the UK win the global race for growth, matching skills to economic needs, and accelerating our energy transition and resilience.”

The survey, based on the responses of 343 manufacturing firms, found:

• Output volumes fell in the quarter to January, after falling at their steepest pace in four years in December (weighted balance of -13%, from -25% in the three months to December). Firms expect volumes to fall again in the three months to April (-19%).
• Output fell in 12 out of 17 sub-sectors, with declines in the glass & ceramics, timber & wooden products, furniture & upholstery, and plastic products sub-sectors driving the decline.
• Total new orders fell in January, and more rapidly than the previous quarter (-20% from -13% in October). Domestic orders fell at a similar pace as the previous quarter (-20%, from -22%), but firms reported an accelerating decline in the volume of new export orders (-23%, from -11%, and the weakest since July 2020). Manufacturers expect the volume of new orders to fall at the fastest pace since the beginning of the pandemic in the three months to April (-32%, from -11% in October).
• Business sentiment deteriorated in January, at the fastest pace since October 2022 (-47%, from -24% in October). Export optimism for the year ahead also fell sharply (-41%, from -16%).
• Investment intentions for the year ahead weakened significantly compared to October. Manufacturers expect to reduce investment in buildings (-42%, from -21% in October), in plant & machinery (-41%, from -12%), in product & process innovation (-26%, from 0%, and the weakest since 2009), and in training & retraining (-14%, from -3%).
• The main constraint on investment was uncertainty about demand (cited by 46% of manufacturers), followed by inadequate net return (33%), and a shortage of internal finance (22%). Concerns around labour shortages have steadily declined for three years and now stand close to the long-run average (14%; long-run average of 11%).
• Average costs rose in the quarter to January, at an accelerated pace (+43%, from +25% in October; long-run average of +19%). Costs growth is expected to remain elevated in the quarter to April (+58%, which were also the strongest expectations since October 2022).
• Average domestic prices were broadly unchanged in the three months to January (+2%, from +10% in October). Export prices fell for a second consecutive quarter (-5%, from -7% in October). Both domestic (+27%) and export (+16%) prices are expected to rise in the next three months.
• Stocks of raw materials (+3%), of work in progress (-1%) and of finished goods (-2%) were broadly unchanged in the quarter to January.
• Manufacturers expect stocks of raw materials (-19%), of finished goods (-14%), and of work in progress (-12%) to fall over the quarter ahead, and at the fastest pace in four years.
• Numbers of people employed fell in the quarter to January, after having risen in the quarter to October (-8%, from +7% in October). Firms expect numbers employed to fall again in the quarter to April (-18%, the weakest expectations since July 2020).

Note: The January 2025 CBI Industrial Trends Survey was conducted between 19 December 2024 and 13 January 2025, with 343 manufacturing firms responding.

A balance is the weighted percentage of companies reporting an increase minus those reporting a decrease.