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Manufacturing outlook worsens amidst Brexit despair

23 October 2019

Manufacturing output continued to fall in the quarter to October, driven largely by a significant decline in the motor vehicles and transport equipment sub-sector, according to the CBI’s latest quarterly Industrial Trends Survey.

The survey of 258 manufacturing firms also showed that prospects for the following quarter are downbeat, with firms anticipating output to deteriorate at a slightly faster rate in the three months to January.

Business optimism has taken a significant hit, falling at the fastest pace since July 2016, and optimism about exports for the year ahead deteriorated to the greatest degree in eighteen years. Investment intentions have also worsened, with plans to spend on buildings, plant & machinery and training & retraining at their most negative since the financial crisis.  

Brexit uncertainty weighed heavily on export prospects, with the proportion of firms citing political/economic conditions abroad as a factor limiting exports over the next quarter hitting a survey record high. Additionally, the share of firms citing quota and license restrictions as a factor limiting exports was at its highest since July 1983.  

While new orders fell at largely the same pace as the previous quarter, firms expect them to fall at a faster pace in the three months to January. Manufacturers did not report a sharp increase in stocks ahead of the October 31st Brexit deadline and don’t expect them to rise again in the three months to January.

Quarterly headcount was down, falling at its fastest since April 2010, with firms anticipating an even sharper decline the following quarter – with expectations at their lowest since the financial crisis. 

Rain Newton-Smith, CBI Chief Economist, said: “This quarter’s findings paint a worrying picture for the manufacturing industry. A combination of Brexit uncertainty and weaker global growth are clearly hitting sentiment and export prospects, with job prospects at their weakest since the global financial crisis.

“Finding a resolution that avoids a no deal Brexit will give firms the confidence they need to step-up investment in people, growth and innovation. But for long-lasting prosperity we need an ambitious free trade agreement which provides tariff-free access to our largest trading partner for our manufacturers right across the country.”

Tom Crotty, Group Director of INEOS and Chair of CBI Manufacturing Council, said: “With Brexit reaching a critical crossroads, these gloomy results are unsurprising yet still very concerning. Most tellingly, manufacturers’ investment intentions across buildings, machinery, and skills are at their worst since the dark days of the financial crisis.

“Manufacturers will be closely watching developments in Brussels and Westminster over the coming days and hoping that policy makers can avert a disastrous no-deal exit. If they fail, then we could be looking at a far gloomier outlook for our sector in the coming months.”

Key findings:

Output

  • Volumes fell in the three months to October (-10% from +1% in September).
  • Only eight out of 17 sub-sectors saw output expand in the quarter to October, with the fall in headline output volumes driven mostly by the motor vehicles & transport equipment sub-sector.
  • Manufacturers expect output volumes to fall at a faster rate in the next three months (-16%).

Orders

  • Total new orders fell in the quarter to October (-15%) at a similar pace to July (-15%).
  • The fall in new orders was driven by a similar pace of decline in domestic orders (-18% from -19% in July) while export orders fell at a slightly slower pace (-24% from -28% in July).
  • Manufacturers expect total new orders to fall at a quicker pace in the next three months (-19%), with domestic orders seeing a slightly slower decline (-12%) and export orders falling at a quicker pace (-26%).  

Headcounts

  • Numbers employed fell in the quarter to October (-9% from -8% in July) at their fastest rate since April 2010.
  • Firms expect employment to fall at an even faster pace next quarter (-22%), constituting the weakest expectations for headcounts since the financial crisis (Oct 2009).  

Costs

  • Average costs in the quarter to October (+16%) grew at a broadly similar pace to July (+15%).
  • Manufacturers expect average cost growth to remain steady next quarter (+16%).

Business optimism

  • Sentiment deteriorated in the three months to October (-44% from -32% in July), at the fastest pace since July 2016.
  • Optimism about export prospects for the year ahead also worsened (-46% from -29% in July) to the greatest extent since October 2001.

Investment intentions

  • Investment intentions for the next year worsened compared to last quarter in three out of four key categories.
  • Firms’ expectations for investment in the next year in buildings (-44%), plant & machinery (-34%), and training & retraining (-28%) were all at their weakest since the financial crisis.
  • Expectations for investment in product & process innovation were broadly flat.

Export orders – looking ahead

  • The share of manufacturers citing political/economic conditions abroad as a factor to limit export orders in the next three months was at a survey record high (66%).
  • The proportion of firms citing quota and import licence restrictions as a factor to limit export orders was at its highest since July 1983 (20%).

Stocks

  • Stocks of raw materials (+9%) grew at a broadly similar pace to July (+10%), well down on the April high (+39%).
  • Both stocks of work in progress and finished goods were roughly flat (0% and -3%, respectively).
  • No noticeable pick-up in stock growth is expected in the next three months, with stocks of raw materials and finished goods anticipated to be broadly unchanged (+2% and +2%, respectively), while stocks of work in progress are expected to fall slightly (-5%).
 
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