CBI: UK Manufacturing Picks Up Strongly but Slowdown in Cards for Year-end

-UK manufacturing activity picks up in July but headwinds loom.

-Demand is healthy but investment is waning and skills shortages biting.

-CBI says UK manufacturing will ease "moderately" before year-end.

© IRStone, Adobe Stock

UK manufacturers saw a sharp increase in activity during recent months as an increase in domestic demand more than offset a slowdown in activity on the international stage, according to Confederation of British Industry (CBI) data, although new order numbers suggest a slower pace of growth is in the cards toward year-end.

Almost half of the 357 manufacturers polled for the latest CBI Industrial Trends survey said output volumes rose during the three months to the end of July while only 14% said activity had fallen, leaving a net balance of 27% of firms that experienced an improvement in turnover. This is up from the 13% of firms that said the same for the three months to the end of April.

Moreover, around 35% of firms said that new orders have risen during recent months while only 20% reported a decrease. This means a net 15% of firms experienced an increase in new work orders during the three months to the end of July, up from the 8% reporting an increase in the prior period.  

"It’s great to see the manufacturing sector firing on all cylinders, with production revving up again after the slowdown earlier this year," says Tom Crotty, a director at Ineos and chair of the CBI Manufacturing Council. “But rising trade tensions and ongoing uncertainty over our future trade and customs arrangements are clearly taking their toll on manufacturers’ confidence and investment.”

The data appears to draw a line beneath a dire start to the year for UK manufacturers. Output from the UK manufacturing sector fell by -1.4% during April, deepening the -0.1% contraction seen in March, and making for a third consecutive decline in activity. 

However, and on the downside, only 18% of firms said they were more optimistic in their outlook for the months ahead while 21% said they were less optimistic. This leaves a net -3% reporting an improvement in confidence, meaning more firms are less confident about the months ahead than vice versa.

Furthermore, the outlook for investment spending appeared to darken, according to the CBI. The balance of firms expecting to increase spending on machinery and equipment rose to +4% from 0% during the previous period, although the balance of companies looking to invest in land and bulldings fell from 0% to -14% during the quarter to the end of July.

Brexit, skills shortages, demand uncertainty and inadequate returns were all cited by the CBI as reasons why business investment, as well as overall activity in the manufacturing sector, could slow again later this year.

"The recovery in the manufacturing sector remains brisk, but firms still aren’t confident enough to increase investment," says Samuel Tombs, chief UK economist at Pantheon Macroeconomics, an independent consultancy. "Strong growth, however, can’t be maintained for long unless manufacturers invest, given that just 39% report that they are working below capacity, only just above Q1’s record low of 38%."

Economists and markets care about the survey and other similar data because manufacturing is Britain's third largest economic sector, so production numbers here can have an impact on expectations for overall GDP growth.

Manufacturing has been a relative bright spot for the UK economy ever since the Brexit vote of June 2016, with the double digit fall in the Pound making British goods cheaper for overseas customers to buy, while a robust domestic economy has also fuelled demand.

This saw industrial firms experience eight consecutive quarters of output growth in the period to the end of 2017, marking the longest expansion for the sector since 1988, although momentum has waned recently.

Advertisement
Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here