UK Manufacturers Eye Global Economic Tremors and Brexit as Outlook Sours, CBI Survey Shows

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- Manufacturing outlook darkens as trade war and Brexit hit sentiment.

- CBI calls for government to provide "clarity" on Brexit direction. 

- As financial markets bet an extension of Article 50 process is near.

UK manufacturers are increasingly uneasy about the global economic outlook and the impact domestic politics might have on their businesses, according to the latest Confederation of British Industry (CBI) Industrial Trends Survey, with new order inflows expected to stall over the coming months. 

Companies told the CBI they expect output to grow at a similarly robust pace to that seen late last year in the first quarter of 2019, but that new order growth will likely flatten over the coming months, which is a negative omen for output in the next quarter and beyond. 326 firms took part in the survey.

Domestic orders are expected to "fall slightly" while the CBI says export order growth is seen picking up a bit further from last quarter's levels. Domestic orders were flat in the final quarter of 2018 after registering their first decline for three years in third quarter.

Employee numbers are expected to remain constant at current levels but companies are planning to reduce investment in plant and machinery this year despite already operating "at capacity" and therefore having only limited ability to cope with any surprise increase in new orders that might come along. 

Spending on employee training and development, as well as on product and process innovation, is also expected to decline after survey respondents told the CBI they intend to cut back in these areas. 

"Sentiment among manufacturers has continued to decline this year in response to slowing export demand and heightened Brexit risk. The quarterly business optimism balance dropped to -23 in Q1—its lowest level since Q3 2016—from -16 in Q4. Manufacturers are the least upbeat about the outlook for exports since the financial crisis," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. 

Wednesday's survey comes as manufacturers wait with baited breath to see if the U.S. and China can strike an agreement that ends the trade war between the world's two largest economies before March 01, when tariffs on $200 billion of China's annual exports to the U.S. will more than double to 25%. 

It also comes after a quarter that saw industrial production turn sharply lower across all of Europe, particularly in the continent's manufacturing heartland of Germany, as EU rules on testing the emissions output of cars and a slowdown in Chinese demand for goods hit production activity hard. 

This is the backdrop for Europe's manufacturing sector and, to a certain extent, the global manufacturing sector. Many economists have said world trade growth will slow this year because of uncertainty thrown up by President Donald Trump's "protectionist" economic policies.

However, the Confederation of British Industry sees only Brexit behind the UK manufacturing sector's woes in recent months. It does not mention global ailments in its briefing to the press and now claims that resolving the "Brexit deadlock" in parliament will be enough to get the sector's wheels moving again.

“The manufacturing sector is clearly feeling the pinch of Brexit uncertainty, with worsening business sentiment coinciding with an ongoing reluctance to invest in new facilities, machinery, innovation and training. Notwithstanding continued growth in output, these underwhelming figures in part reflect businesses’ continuing desire for clarity," says the CBI's Anna Leach. 

Prime Minister Theresa May's EU exit plan was rejected in a landslide parliamentary vote this January so the legal position now is the UK will leave the EU in March and default to trading with it on World Trade Organization terms. 

That would lead to tariffs as well as non-tariff barriers being imposed on goods travelling between the UK and EU, increasing bureaucracy and costs for companies that trade internationally. Most economists say such an exit would be bad for UK economic growth.

PM May needs consensus and a parliamentary majority, but the opposition and some members of her own Conservative Party say her plan will put too much distance between the UK and EU.

Meanwhile, supporters of Brexit in both the Conservative Party and wider country say it will deliver nothing more than an exit in name only. Some also say it would lead to a situation that is even worse than that. 

Analysts are increasingly of the view that Brexit-supporting opponents of PM May's deal are on the verge of backing it in order to see off the threat of the UK's departure being cancelled altogether.

This is because market hopes of an extension to the Article 50 EU withdrawal period that ultimately leads to a second referendum, a Brexit-cancelling election or some other kind of exit-nullifying agreement between the political parties in Westminster have been on the rise in recent weeks. 

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