30 August 2018

Update

Business surveys indicate steady momentum into Q3

Official data showed that GDP growth picked up slightly in Q2, after a weak Q1which was hit by bad weather. According to CBI surveys, growth is set to be steady but relatively subdued in Q3, consistent with the CBI’s latest economic forecast. Nevertheless, the outlook remains challenging in retail and services. Much of this is being driven by the ongoing squeeze on household incomes, with wage growth still tepid despite elevated skills shortages.

Business surveys indicate steady momentum into Q3

The CBI’s latest Industrial Trends Survey showed that manufacturing output growth eased slightly in the three months to August, but remained far above the long-run average. Similarly, total order books softened but also remain elevated historically, while export orders books were strong.

However, the strength in manufacturing contrasts with weaker conditions in other sectors of the economy. The quarterly Distributive Trades Survey revealed that retail sales continued to expand in the year to August, but underlying conditions remain tough. Orders placed on suppliers fell in the year to August, at a sharper pace than the previous month, while headcount fell further, marking seven quarters of falling employment. Additionally, for the second consecutive quarter, retailers expect their business situation to deteriorate over the next three months and investment spending for the year ahead is set to fall.

The quarterly Service Sector Survey painted a relatively subdued picture across the sector. Business and professional services growth slowed in the three months to August and while growth recovered in consumer services, it remained muted overall. Cost pressures across the sector remained strong, which depressed firms’ bottom lines. Profitability in consumer services fell for the second quarter running, while profits were flat in business & professional services. With moderate growth in business volumes expected in the three months ahead, services firms appear unwilling to invest significantly more in the year ahead.

The latest labour market statistics continued to show a tight jobs market. The employment rate remained at a record high, while the unemployment rate fell by 0.2 percentage points to reach a new multi-decade low (of 4%) in the three months to June. However, nominal regular pay growth (excl. bonuses) remained sluggish, slipping to a six-month low (of 2.7% on the year) in the three months to June.

Nevertheless, elevated inflationary pressures mean that real regular pay growth remains weak and dropped to 0.4% on a year ago (on the less volatile three-month rolling basis), slipping to a six-month low. This is despite the backdrop of a tight labour market, illustrated in elevated skills shortages across the CBI’s surveys. This is particularly true of manufacturing, where those citing labour shortages as a factor to limit capital expenditure is at a record high.

For more information, please contact Charlotte.Dendy@cbi.org.uk