UK manufacturers enter 2020 with “spring in their step”

Business optimism and investment intentions have improved significantly in the three-months to January, with optimism growing at the fastest pace since April 2014, according to the latest CBI Industrial Trends Survey.

A record proportion of UK manufacturers are expecting to authorise capital expenditure in plants and machinery in an effort to increase capacity and output, following five consecutive quarters of falling intentions.

Young manual worker using grinder on metal in factory - image courtesy of Shutterstock

The share of manufacturing businesses citing expanding capacity as a driver of planned capital expenditure was at a survey record high, 57%.

Similarly, business optimism saw strong growth in the three months to January. The 67-point increase from -44% to +23% is the largest swing in sentiment over a single quarter on record (since 1958).

The boost in optimism displayed by UK manufacturers is “very encouraging” given the challenging trading environment businesses have faced in recent months, according to chair of the CBI Manufacturing Council, Tom Crotty; however, it’s clear the sector “is not out of the woods yet,” he added.

This optimism could prove short “unless the government use their newfound strength to help address underlying issues holding back manufacturers,” Crotty warned.

Capitalising on this rebound in optimism among UK manufacturers requires the UK and EU to establish a trade deal that “supports growth in this sector,” added Anna Leach, CBI deputy chief economist.

Underlying issues

Output volumes in the three months to January fell for the eighth month in a row, largely reflecting a sharp fall in motor vehicles output.

The main positive contributors to output volumes were the mechanical engineering and food, drink & tobacco sub-sectors.

Total new orders also fell at the quickest rate since the financial crisis, reflected by a similarly fast fall in domestic orders. However, the CBI expects orders and output to both see an uptick in the quarter ahead.

Meanwhile, export sentiment continued to fall, but was noticeably less gloomy compared to last quarter.

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.

However, a record proportion of manufacturers were concerned that a shortage of labour could constrain investment spending over the year ahead.

Moreover, headcount fell in the quarter to January at its fastest pace since the financial crisis, but firms reportedly expect the rate of decline to slow next quarter.