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Manufacturers sentiment edges up, but investment expected to be flat

25 July 2023

MANUFACTURERS’ SENTIMENT EDGES UP, BUT INVESTMENT EXPECTED TO BE FLAT IN THE YEAR AHEAD AMID RISING FINANCE COSTS – CBI INDUSTRIAL TRENDS SURVEY

Sentiment among manufacturers improved for the first time in two years, according to the CBI’s quarterly Industrial Trends Survey for July. Output volumes stabilised in the three months to July, having fallen steadily since the February survey, and are expected to grow next quarter.

Growth in domestic selling prices slowed for a fifth consecutive quarter in the three months to July, but growth in unit costs picked up, implying pressure on manufacturers’ margins. Investments intentions generally weakened, with rising shares of firms citing concerns about the availability of internal finance and the cost of finance—excluding the pandemic, the share of manufacturers citing the cost of finance as a barrier to investment rose to its highest since 1991.

The survey, based on the responses of 239 manufacturing firms, found:

  • Business sentiment rose for the first time since July 2021 (balance of +6%, from -2% in April). Export optimism for the year ahead rose for the first time since October 2021 (+5%, from -17% in April).
  • Output volumes were flat in the quarter to July, ending five consecutive rolling quarters of decline (balance of +3%, from -6% in the three months to June). Firms expect output to expand over the next three months (+9%).
  • Total new orders fell in the quarter to July (balance of -6%, from -3% in April), but new orders are expected to be unchanged over the next three months (+0%).
  • Growth in average costs per unit of output accelerated in the quarter to July, having slowed over the four previous quarters (balance of +57%, from +50%).
  • Growth in domestic selling prices eased significantly in the quarter to July (balance of +18%, from +32%). Both domestic (+18%) and export (+21%) price growth is expected to remain elevated over the next three months.

 

Ben Jones, CBI Lead Economist, said:

“While there are reasons for optimism among manufacturers this quarter, the overall picture is still subdued. Output has stopped falling, supply chains continue to recover and concerns over labour shortages have eased a little. But cost pressures remain acute and there are worrying signs that a squeeze on margins and higher finance costs are now hitting investment plans.

“In a challenging environment for manufacturing investment, confidence-building measures have a big role to play, whether that’s scaling up Made Smarter into a national programme or providing clearer signals of intent over the UK’s response to the US Inflation Reduction Act and the EU’s Green Industrial Plan.”

 

Further details:

  • Orders or sales were the most commonly cited factor likely to limit output in the next three months (58%, from 57% in April). Nonetheless, this remains below the long run average of 64%.
    • The share of firms citing a shortage of skilled labour as a constraint on output over the next three months eased for the third consecutive quarter (29% from 31% in April and a recent peak of 49% in October 2022), but remained well above the long run average (16%).
    • The share of firms citing materials/components availability as a constraint fell to its lowest since October 2020 (31%, from 37% in April and a recent peak of 71% in July 2022).
  • Investment intentions for the year ahead generally weakened. Manufacturers expect to raise investment in training & retraining, though at a slower pace (balance of +5%, from +15%), with investment expected to be broadly stable in product & process innovation (+3%, from +8%), plant & machinery (-1%, from +14%) and buildings (-1%, from -4%).
  • The main constraint on investment was uncertainty about demand (cited by 40% of manufacturers), followed by inadequate net returns (35%). However, the shares of firms citing the availability of internal finance (24%) and the cost of finance (15%) both rose to the highest since the three months to July 2020.
  • Stocks of raw materials (balance of +18%, from +7%) and work in progress (+6%, from +2%) rose in the quarter to July, while stocks of finished goods (-1%, from +5%) were broadly stable. Manufacturers expect stocks of raw materials (+8%), work in progress (+12%) and of finished goods (+5%) to rise in the next three months.
  • Numbers employed rose slightly in the three months to July (+4%, from +2%). Firms expect a strong rise in headcount in the next three months (+16%).