Press release

22 Jan 2020 London, GB

January CBI industrial trends points to modest pick-up in UK manufacturing activity

The January CBI industrial trends report points to the manufacturing sector receiving a helping hand from reduced near-term uncertainties, following December’s decisive General Election and the UK definitely leaving the EU on 31 January with a deal.

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  • The January CBI industrial trends report points to the manufacturing sector receiving a helping hand from reduced near-term uncertainties, following December’s decisive General Election and the UK definitely leaving the EU on 31 January with a deal. However, the sector still looks to be having a subdued time at the start of 2020. There was a limited increase in new orders (reaching a five-month high), while output expectations for the next three months turned modestly positive for the first time since last July.
  • Strikingly, the CBI’s simultaneously released quarterly survey for January showed optimism in the manufacturing sector spiking to a six-year high. Another welcome development saw a pick-up in investment intentions.
  • However, negative news saw a balance of 15% of manufacturers reporting that output volumes fell over the three months to January; this was only marginally up from 16% in December.
  • Manufacturers are clearly hoping that diminished near-term uncertainties surrounding the economy, 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 and discretionary purchases.
  • Meanwhile, there have been some signs that global economic activity may be stabilising while the Phase One trade deal between the UD and China has raised hopes of a less fraught trading environment this year.
  • However, Brexit uncertainties along with a still challenging global environment may well continue to limit the upside for investment in 2020.  The UK Government has stated that the UK will diverge from EU rules in their future relationship (after the transition arrangement ends), which may also be a concern for some manufacturers.
  • UK manufacturers could also be impacted by EU companies switching supply chains away from the UK. This may be countered however by UK companies switching their supply chains from the EU to the UK.

Howard Archer, chief economic advisor to the EY ITEM Club, comments:

The January CBI industrial trends survey points to a modest improvement in manufacturing activity with some lift in activity seeming coming from reduced uncertainties following December’s decisive general election result and near-term clarity on the UK leaving the EU on 31 January with a deal.

“However, the sector is still seeing relatively subdued activity despite January’s improvement. For much of 2019, particularly late on, the manufacturing sector was hampered as demand was impacted by domestic political and Brexit uncertainties as well a challenging global economy. Uncertainties fuelled business caution over investment, limiting expenditure on capital goods. There also 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 rose to a five-month high of -22% in January from -28% in December. However, this is still below the long-term average of -13%. It had earlier improved 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 improved markedly to -8% in January from -35% in December; this also is still below the long-term average of -17%. it had been as low as -41% in October, which had been the weakest since December 2009.

“The balance for stocks of finished products rose to +26% in January from +24% in December +17% in November and +11% in October. This was well above the long-term average of +13%.

“Output expectations for the next three months turned modestly positive for the first time since last July, with a balance of +4% of manufacturers expecting a rise. This was up from -7% in December, -1% in November, 16% in October and -19% in September.

“However, less positive news came with manufacturing volumes reported to have fallen over the past three months with a substantial balance of -15% of manufacturers reporting a rise. This was only fractionally up from the December balance of -16%, which had been the weakest past output balance since September 2009 and down from -9% in November, -10% in October, +1% in September and -3% in August. Output reportedly only rose in 5 out of 17 sectors in the three months to January.

“A balance of +2% of manufacturers expect to raise prices over the next 3 months; this compares to +6% in December, -1% in November, -3% in October and +12% in September.

Quarterly survey indicates modest rise in confidence

“The simultaneously released CBI quarterly survey showed that confidence among manufacturers rose sharply to a near six-year high in January; this was in marked contrast to October’s lowest level since July 2016.

“Specifically, the business optimism index jumped to +23% in January (the highest since April 2014) after weakening to -44% from -32% in July. Manufacturers assessment for export prospects also picked up appreciably although they remained in negative territory. The exports prospects balance rose to -8% in January from an 18-year low of -44% in October.

“Another positive saw investment intentions improve after particularly weak readings in October. A balance of +5% of manufacturers expect to invest more in plant and machinery. This was up markedly from -44% in the October survey and followed five successive quarters of falling intentions in this area. There was also essentially stabilisation in investment intentions for training & retraining (up to -3% from -28%). Expectations for investment in product and process innovation were reported to be broadly flat at -1% as they had been in the previous survey. Investment intentions for buildings were less negative at -11% compared to -44% in the October survey.

“Significantly, the CBI observed that “a record proportion of firms expecting to authorise capital expenditure in order to expand capacity. But a record proportion of manufacturers were concerned that a shortage of labour could constrain investment spending over the year ahead.”

“A balance of 16% of manufacturers reported that headcount dropped over the past three months, the weakest balance since the financial crisis. A reduced balance of 8% of manufacturers expect to reduce headcount over the next three months (was 22% in October survey, the most since October 2009).

Manufacturing output contracted markedly in November

“The latest ONS data shows that manufacturing output contracted 1.7% month-on-month and 2.0% year-on-year in November; this followed a gain of 0.5% month-on-month in October. Manufacturing output likely suffered in November from a correction after there had been some build up in stocks by companies ahead of the UK’s planned exit from the EU on 31 October, which was delayed.

“Manufacturing output was down 0.8% in the three months to November compared to the three months to August. The weakness was widespread with 10 out of 13 sectors suffering three-month/three-month contraction in November.”