Sentiment drops in manufacturing, as output volumes weaken – CBI industrial trends

Sentiment across the manufacturing sector fell in October and at the fastest pace in two years, according to the CBI’s latest quarterly Industrial Trends Survey. Manufacturing output volumes fell over the quarter to October, though less rapidly than in the quarter to September. Output is expected to be broadly unchanged over the next three months.

Total new orders fell in the quarter to October, reflecting the sharpest decline in domestic orders since July 2020, as well as lower export orders. A further decline in new orders is expected, with over two thirds of respondents citing the strength of order books as a factor likely to limit output over the next three months.

Pressures on costs and prices have diminished compared to July. Growth in average costs eased to its slowest pace in four years in the quarter to October, with a similar increase expected in the coming quarter. Domestic and export selling price inflation has also eased, with the latter falling for the first time in four years. Overall selling prices are expected to be stable in the three months to January.

The outlook for hiring and investment remains subdued. Manufacturing headcount actually rose for the first time in over a year over the past quarter, but numbers employed are expected to remain unchanged over the coming quarter. Meanwhile, investment intentions for the year ahead have weakened across the board.

Ben Jones, CBI Lead Economist, said:

“Sentiment in the manufacturing sector appears to have soured in recent months. Demand has softened both at home and abroad. And although cost pressures have eased, costs are still rising faster than prices, implying a further squeeze on margins.

“The recent downturn is expected to bottom out in the coming quarter, which is encouraging. But amid a more uncertain outlook manufacturers have scaled back their plans to invest in buildings, capital equipment, innovation and training.

“Manufacturers will be looking to the Chancellor to deliver a confidence-boosting budget that supports business and greases the wheels of investment. While possible tax rises remain a concern, firms believe that clarity over future tax plans, measures to enhance productivity, and the country’s net zero trajectory can all help cement the path to long-term growth.”

The survey, based on the responses of 322 manufacturing firms, found:

• Output volumes fell slightly in the quarter to October, after falling at a rapid pace in September (weighted balance of -6%, from -20% in the three months to September). Firms expect volumes to be broadly unchanged in the next three months.
  • Output rose in just 4 out of 17 sub-sectors, with growth in the motor vehicles & transport equipment, chemicals, mechanical engineering and plastic products sub-sectors offset by declines in the rubber products, metal manufacture and furniture & upholstery sub-sectors.
• Total new orders fell in October, at a slightly faster pace than the previous quarter (-13% from -9% in July). Domestic orders fell over the quarter (-22%, from -15%) as did the volume of new export orders (-11%, from +3%). Manufacturers expect domestic (-11%) orders to fall again over the next three months, while export orders are anticipated to be unchanged (-1%).
• Business sentiment deteriorated in October, at the fastest pace in two years (-24%, from -9% in July). Export optimism for the year ahead also fell (-16%, from 0%).
• Investment intentions for the year ahead weakened compared to July. Manufacturers expect to reduce investment in buildings (-21%, from -11% in July) and in plant & machinery (-12%, from +6%). Investment in training & retraining (-3%, from +7%) and in product & process innovation (0% from +18%) is anticipated to be unchanged.
  • The main constraint on investment was uncertainty about demand (cited by 52% of manufacturers), followed by inadequate net return (38%), a shortage of labour (26%, the highest since January 2023), and a shortage of internal finance (19%). Concerns around the cost of finance have retreated from a 33-year high set in January 2024 (excluding the pandemic period) but remain more than double the long run average (11%).
• Average costs rose in the quarter to October, at the slowest pace in four years (+25%, from +52% in July; long-run average of +18%). Costs growth is expected to remain elevated in the quarter to January (+27%, which were also the weakest expectations in four years).
• Average domestic prices increased over the three months to October (+10%, from +15% in July). Export price inflation turned negative for the first time since the quarter to October 2020 (-7%, from +22% in July). Domestic prices are expected to be unchanged in the next three months (0%), whereas export prices are anticipated to fall again (-7%).
• Stocks of raw materials rose marginally in the quarter to October (+4%), while stocks of both work in progress (+1%) and of finished goods (+1%) were broadly stable.
  • Manufacturers expect stocks of work in progress (-2%), of finished goods (-2%), and of raw materials (-3%) to be broadly unchanged in the next three months.
• Numbers employed rose in the quarter to October, for the first time since July 2023 (+7%, from 0% in July). Firms expect numbers employed to be broadly unchanged in the next three months (-3%).