- The December CBI industrial trends report points to the manufacturing sector having a troublesome end to a largely challenging 2019, when it has faced soft domestic and foreign demand.
- Manufacturers have clearly been impacted by prolonged Brexit and domestic political uncertainties. This has fuelled business caution over investment decisions and the purchase of capital goods. Meanwhile, consumers seemingly became more cautious in making big-ticket purchases later on in 2019. On the export front, manufacturers are being hampered by slower global growth and a difficult and uncertain trading environment.
- The December CBI survey indicates that the manufacturing sector could well be a drag on UK GDP in the fourth quarter with a balance of -16% of manufacturers reporting that their output had risen over the three months to December. This is the weakest balance for past output since September 2000 and reinforces our suspicion that GDP growth is unlikely to be any better than 0.1% quarter-on-quarter at best in the fourth quarter, with a real danger that the economy could have stagnated.
- The orders balance at -28% in December remained substantially below its long-term average of -13%. Export orders were particularly weak but domestic demand was also limited.
- Output expectations for the next three months were modestly negative.
- Manufacturers will be hoping that the uncertainties surrounding the economy are diminished by last week’s decisive General Election result and by the UK leaving the EU with Boris Johnson’s deal on 31 January. They will be hoping that this encourages businesses to step up their investment and demand for capital goods and that consumers also become more willing to splash out on big-ticket durable goods.
- However, significant Brexit uncertainties remain which, along with a challenging global environment may limit the upside for investment in 2020. Consumers may also face less favourable fundamentals due to a softer labour market and reduced earnings growth.
- UK manufacturers could also potentially be impacted by EU companies switching supply chains away from the UK. This may be countered though by UK companies switching their supply chains from the EU to the UK.
Howard Archer, chief economic advisor to the EY ITEM Club, comments:
“There is little in the December CBI industrial trends survey to inspire hopes that the new year will bring better times for the UK manufacturing sector after what looks to have been a very difficult fourth quarter. However, the hope for manufacturers is that reduced uncertainties following the decisive General Election result and the UK now leaving the EU with Boris Johnson’s deal on 31 January will encourage businesses to invest more and lift consumer willingness to buy big-ticket items.
“The December survey suggests that the manufacturing sector was hampered once again as domestic demand was pressurised by heightened uncertainties in the run-up to the General Election and a lack of clarity over Brexit. Major uncertainties have fuelled business caution over investment, limiting expenditure on capital goods. There has also recently appeared to be increased consumer reluctance to spend on big-ticket manufactured items.
“Meanwhile, weakened global growth and an uncertain trading environment weighed down on foreign demand for UK manufactured goods.
“The survey shows the orders balance dipped to -28% in December after improving to -26% in November from a nine-and-a-half year low of -37% in October. December’s reading remained substantially below the long-term average of -13%.
“The export balance relapsed to -35% in December after improving to -22% in November from -41% in October, which had been the lowest level since December 2009. December’s reading of -35% was substantially below the long-term average of -17%.
“The balance for stocks of finished products rose to +24% in December from +17% in November and +11% in October. This is above the long-term average of +13%.
“Manufacturing volumes were reported to have fallen over the past three months with a substantial balance of -16% of manufacturers reporting a rise. This was the weakest output balance since September 2009 and down from -9% in November, -10% in October, +1% in September and -3% in August. Only six of the 17 manufacturing sub-sectors were reported to have seen a rise in output over the three months to December.
“Output expectations for the next three months are negative with a balance of -7% of manufacturers expecting a rise. Output expectations had previously stabilised in November after being sharply in negative territory in both October and September.
“A balance of +6% of manufacturers expect to raise prices over the next three months; this compared to -1% in November, -3% in October and +12% in September.”
Manufacturing output rose modestly in October, but underlying performance remained weak
“The latest ONS data shows that manufacturing output rose 0.2% month-on-month in October. This was a lacklustre rebound after a dip of 0.4% month-on-month in September and it could also have been modestly boosted by some stockbuilding ahead of the UK’s scheduled departure from the EU on 31 October. Consequently, manufacturing was still down 1.2% year-on-year in October.
“Manufacturing output was also down 0.7% on a three-month/three-month basis in October.”