- Decent news for the economy as the February CBI industrial trends report points to the manufacturing sector getting a further helping hand from reduced near-term uncertainties, following December’s decisive General Election and the UK leaving the EU on 31 January with a deal.
- However, the sector is still hardly racing ahead. A balance of 11% of manufacturers reported that output volumes fell over the three months to February, although this was at least down from 15% reporting a drop in the three months to January.
- There was an increase in the new orders balance to a six-month high with export orders also at a six-month high. Output expectations for the next three months picked up to a 12-month high. Even so, the orders balance is still below its long-term average. There are signs that some businesses are still relatively cautious about lifting their investment, and hence demand for capital goods, despite increased confidence.
- Manufacturers will clearly hope that over the coming months businesses do become more willing to step up their investment and demand for capital goods. They will also be hoping that consumers become increasingly willing to splash out on big-ticket durable goods as well as make more discretionary purchases.
- There is still uncertainty over whether the UK and EU can reach agreement on their relationship by the end of 2020, along with a still pretty challenging global environment, which may continue to limit the upside for investment in 2020.
- The UK Government has stated that the UK will diverge from EU rules in its future relationship (after the transition arrangement ends). Some manufacturers may be concerned that this could result in additional costs and frictions at the border.
- UK manufacturers could 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 manufacturing sector is still seeing relatively subdued activity despite February’s improvement. Indeed, manufacturing volumes were still reported to have fallen over the previous three months, albeit at a reduced rate. A balance of -11% reported a rise; this compared to -15% in January and -16% in December (which had been the weakest past output balance since September 2009). Output rose in only five out of 17 sub-sectors, with the largest declines in output occurring in the food, drink & tobacco and mechanical engineering sub-sectors.
“The CBI survey shows that the orders balance rose to a six-month high of -18% in February from a five-month high of -22% in January and -28% in December. It had been as low as -37% in October (a nine-and-a-half year low). However, February’s level of -18% was still below the long-term average of -13%. Although the CBI survey did not mention it, there are signs that some businesses are still relatively cautious about lifting their investment and hence demand for capital goods.
“The export balance improved to a six-month high of -17% in February from -21% in January and -35% in December. It had been as low as -41% in October, which had been the weakest since December 2009. February’s reading was in line with the long-term average of -17%.
“The balance for stocks of finished products fell back to +15% in February after rising to +26% in January from +24% in December +17% in November and +11% in October. This was nearly back in time with the long-term average of +13%.
“Output expectations for the next three months rose further to a 12-month high in February after turning modestly positive in January for the first time since last July. A balance of +8% of manufacturers expected a rise. It had previously improved to +4% in January from -7% in December, -1% in November, 16% in October and -19% in September.
“A balance of -2% of manufacturers expect to raise prices over the next three months; this compared to +2% in January, +6% in December, -1% in November, -3% in October and +12% in September.
Manufacturing output markedly over fourth quarter of 2019
“2019 was a very difficult year for the manufacturing sector as output contracted 1.5%.
“Latest ONS data show that manufacturing output rose 0.3% month-on-month in December. However, this followed a sharp drop of 1.5% month-on-month in November, so output was still down 2.5% year-on-year in December.
“Manufacturing output contracted 1.1% quarter-on-quarter in the fourth quarter of 2019. 11 of the 13 manufacturing sub-sectors suffered contraction in the fourth quarter, with the largest drop occurring in transportation equipment.
“This was the third successive quarter of contraction in manufacturing output following drops of 0.2% quarter-on-quarter in the third quarter and 3.0% quarter-on-quarter in the second quarter. It had earlier expanded 1.8% quarter-on-quarter in the first quarter of 2019 as it was buoyed by customer stockbuilding ahead of the 26 Marc Brexit deadline.”