Manufacturing
activity dropped in the quarter to July, but firms expect a slight recovery in
the next few months, according to the CBI’s latest quarterly Industrial Trends
Survey.
The survey of 291
manufacturing firms showed that optimism fell at the fastest pace since July
2016 – just after the 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.
Rain Newton-Smith,
CBI Chief Economist, said: “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.”
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 to 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 our July 2019 economic
forecast.
Key findings:
- 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 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 to +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 (+2% from +21% in April), 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
& 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 & retraining and product & 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%).
