The survey of 300
manufacturing firms reported that business optimism improved significantly in
the quarter to January, at the fastest pace since April 2014.
Meanwhile, export
sentiment continued to fall, but was noticeably less gloomy compared to last
quarter.
Investment
intentions also improved following particularly glum expectations in October,
with 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.
The improvement in
manufacturers’ sentiment belied poor activity over the quarter.
Output volumes in
the three months to January fell at a similarly quick pace to last month,
largely reflecting a sharp fall in motor vehicles output. This marked the
eighth month in a row of flat or falling output volumes. Total new orders fell
at the quickest rate since the financial crisis, reflected by a similarly fast
fall in domestic orders. However, orders and output are expected to recover
slightly in the quarter ahead.
Moreover, headcount
fell in the quarter to January at their fastest pace since the financial
crisis, but firms expect the rate of decline to slow next quarter.
Anna Leach, CBI
Deputy Chief Economist, said: “With business optimism improving at its fastest
pace since 2014 and some of the squeeze on investment plans lifting, it’s clear
manufacturers are entering the new year with a spring in their step. Firms are now
planning to invest more in plants and machinery, which will ultimately help
increase capacity and output.
“However, this boost
to sentiment belies poor trading conditions over the past quarter, with output
and orders still declining. If we are to build on this rebound in optimism
among UK manufacturers, it is crucial for the UK and EU to establish a trade deal
that supports growth in this sector.”
Tom Crotty, Group
Director at INEOS and Chair of the CBI Manufacturing Council, said: “The boost
to optimism in the manufacturing sector is very encouraging given the difficult
environment that firms have faced in recent months. However, it is clear that
the sector is not yet out of the woods in terms of performance, which means
that this optimism could prove to be short-lived unless the government use
their newfound strength to help address underlying issues holding back
manufacturers.
“Manufacturers are
ready to work with the government to make real progress on key domestic
challenges such as increasing productivity, addressing skills shortages,
improving sustainability and tackling climate change.”
Key findings:
Output
• 19% of businesses
said that the volume of output rose in the three months to January, while 33%
said it was down, giving a rounded balance of -15%.
• Output only
expanded in five out of 17 sub-sectors. The headline drop in volumes largely
reflected a sharp fall in motor vehicles output. Meanwhile, the main positive
contributors to output volumes were the mechanical engineering and food, drink
& tobacco sub-sectors.
• Manufacturers
expect output to stabilise next quarter (+4%) – the strongest expectations in 7
months.
Orders
• Total new orders
dropped in the quarter to January (-21%) at the fastest pace since the
financial crisis, with 24% of firms reporting up and 45% reporting down.
• The fall in new
orders was reflected in the quickest drop in domestic orders (-21%) since the
financial crisis, while export orders fell at a slower pace than last quarter
(-10% from -24% in October).
• Manufacturers
expect total new orders to grow next quarter (+9%), with domestic orders
broadly flat (-2%) and export orders growing slightly (+5%).
Headcounts
• Headcount fell in
the quarter to January (-16%) at the fastest pace since the financial crisis.
• Firms expect
employment to decrease at a slower pace in the three months to March (-8%).
Costs
• Average costs in
the quarter to January (+20%) grew at a slightly faster pace than October
(+16%).
• Manufacturers
expect average cost growth to remain roughly steady next quarter (+19%).
Business optimism
• Business optimism
improved significantly in the three months to January (+23% from -44% in
October), which is the strongest it’s been since April 2014. This also
constituted the largest swing in sentiment (67% points) in a single quarter on
record (since 1958).
• Meanwhile, export
sentiment was noticeably less gloomy compared to last quarter (-8% from -46% in
October).
Investment intentions
• Firms expect to
invest a little more in plant & machinery (+5%) following five quarters in
a row of falling investment intentions, while they expect capital expenditure
on product & process innovation (-1%) and training & retraining (-3%) to
be roughly the same as they planned in October.
• Expectations for
investment in buildings remained negative despite improving noticeably from
last quarter (from -44% in October to -11%).
Expected constraints on activity
• The share of
manufacturers citing political/economic conditions abroad as a factor to limit
export orders in the next three months declined from 66% in October to 48% in
January.
• Additionally, the
share of firms citing quota/import restrictions as a factor to limit export
orders fell from 20% in October to 5% in January.
Business prospects
and plans
• The share of
manufacturers citing expanding capacity as a driver of planned capital
expenditure was at a survey record high (57%).
• The share of firms
citing labour shortages as a factor likely to limit investment was at its
highest on record (33%).
