UK manufacturing output accelerates, but ‘wait-and-see’ mode persists

Posted on 24 Jul 2018 by Jonny Williamson

Manufacturing growth has accelerated to its strongest pace in a year, yet investment decisions have deteriorated, according to the latest quarterly CBI Industrial Trends Survey.

Investment Falling - Pound currency graph falling illustration design over white - image courtesy of Depositphotos.
Planned spending on ‘product & process innovation’, and on ‘training & retraining’ is expected to fall at the fastest rate since July and April 2009, respectively – image courtesy of Depositphotos.

The survey of more than 350 manufacturers revealed that new orders continued to expand at a brisk pace, with a pick-up in the domestic market offsetting a slight slowdown in new export orders.

Sentiment regarding general business conditions remained unchanged for a second consecutive quarter, but optimism regarding export prospects stalled, having increased steadily for much of the past two years.

Furthermore, growth in output and total orders are expected to slow moderately in the three months to October.

Investment intentions deteriorated significantly in the three months to July. Firms are planning to keep spending on plant and machinery broadly stable over the year ahead and expect to cut back on investment in buildings at a pace that is broadly in line with the historical average.

However, firms have dialled down on investment in “intangible” assets – product & process innovation and training & re-training – with spending in both categories expected to fall at a pace unseen since the global financial crisis.

Investment intentions within UK manufacturing were subdued despite signs that capacity pressures were rising again last quarter. The proportion of firms working below capacity fell close to the record-low seen at the turn of the year.

Meanwhile, the share of firms citing a lack of skilled labour as a likely constraint on activity rose well above the long-run average. Additionally, concerns that labour shortages would hold back capital spending in the year ahead increased to the highest on record.

CBI chief economist, Rain Newton-Smith commented: “The pick-up in output growth is good news and with new orders still running at a healthy rate, the near-term outlook for manufacturers remains reasonably bright.

“Yet manufacturers are still in ‘wait-and-see’ mode when it comes to their investment plans. Skills shortages are increasing and making it hard for businesses to invest in capital projects, particularly with on-going uncertainty around the direction of Brexit talks.

“The retrenchment of training budgets is worrying at a time when skills shortages are increasing, and it underlines the urgent need to pick up the pace on Apprenticeship Levy reform.”