Output to stabilise but profitability squeeze to continue - CBI Industrial Trends Survey

Manufacturing output is expected to stabilise in the next three months, according to the latest quarterly CBI Industrial Trends Survey. That follows a decline in the three months to October, which extended a period of generally flat or falling production that began in mid-2022.

The latest decline in output volumes was broad-based, driven particularly by declines in the food, drink & tobacco, chemicals and metal products sub-sectors. However, the fall in output was slower than the average seen over this year so far, and manufacturers expect output to be broadly flat in the three months to January. Nonetheless, labour-related constraints to near-term output have risen: the share of manufacturers citing skilled labour as a constraint to production jumped to its highest since January 2025. Similarly, limitations from “other labour” availability rose to the highest since mid-2022. 

The volume of total new orders also fell in October, though at the slowest pace since April 2025, reflecting declines in both domestic and export orders. Manufacturers expect total orders to decline again in the three months to January, at a similar pace. This comes as manufacturing competitiveness deteriorated in all major markets.

Elsewhere, cost pressures remained elevated in the three months to October, with unit costs rising at a rapid pace once again. Domestic selling prices also rose, but growth eased relative to July, whereas export selling prices were flat. Domestic selling price inflation is expected to pick up further in the coming quarter, but is still set to run well below costs inflation, implying a continuing squeeze on profitability.

Against this backdrop, investment intentions for the year ahead remain weak. Firms expect to reduce investment in plant & machinery, buildings, innovation and training over the year ahead, held back by uncertainty about demand, inadequate net returns and a shortage of labour – the latter cited by the greatest proportion of respondents in two years.

However, employment was broadly flat in the quarter to October, marking the first time headcount was reported to have not fallen in two years, and numbers employed are expected to rise modestly in the three months to January.

Cameron Martin, Senior Economist, CBI, said:

“There are growing signs of stabilisation for manufacturers, with firms expecting a prolonged period of falling output to come to an end in the coming months and anticipating their first increase in headcount in two years.

“But with orders still falling and labour shortages picking up, significant challenges remain. Stubbornly high costs are also squeezing profitability, while deteriorating competitiveness and fragile business confidence continue to weigh on investment decisions. Without an improvement in the underlying business environment, these tentative signs of stabilisation will struggle to translate into sustained growth.

“If the government wants to meaningfully tackle the cost of living, it must give manufacturers the breathing space to invest and drive the productivity growth needed to sustain rising real wages. Next week’s Budget must deliver this by cutting business electricity costs, reducing labour costs and reforming business rates to support rather than hinder investment and growth.”

The survey, based on the responses of 263 manufacturing firms, found:

•    Business sentiment deteriorated in October, with manufacturers’ optimism about both the business situation (weighted balance of -27%) and export prospects (-28%) declining. 
•    Output volumes fell in the quarter to October, at a faster pace relative to the quarter to September (-10%, from -4% in the three months to September). The decline in output volumes was broad based (occurring in 11 out of 17 sub-sectors), driven by declines in the food, drink & tobacco, chemicals and metal products sub-sectors. Firms expect output to be broadly flat in the three months to January (-1%), marking the strongest expectations since February 2025.
o    The share of firms citing orders or sales as a factor likely to limit output in the next three months was broadly unchanged from July, standing close to historical norms (68%, from 70% in July; long-run average of 70%).
o    However, the share of firms citing a shortage of skilled labour as a constraint on output over the next three months jumped to its highest since January 2025 (32%, from 23%; long-run average of 17%). The share citing other labour also rose to its highest since July 2022 (22%, from 6%; long-run average of 5%).
o    The share citing credit or finance as a constraint rose to its highest since July 2020 (11%, from 8%; long-run average of 4%).
•    Total new orders fell through the quarter at the slowest pace since April 2025 (-16%, from -24% in July), reflecting declines in both domestic orders (-13%) and export orders (-15%). Manufacturers expect the total volume of new orders to decline in the three months to January, at a similar pace (-17%).
•    Investment intentions for the year ahead are weak. Manufacturers expect to reduce investment in plant & machinery (-34%, from -43% in July), buildings (-32%, from -43%), product & process innovation (-11%, from -22%), and training & retraining (-11%, from -20%).
•    The main constraint on investment was uncertainty about demand (cited by 50% of manufacturers), followed by inadequate net returns (38%), though both citations were in line with their long-run averages. However, concerns over a shortage of labour picked up significantly (22%), to the highest since October 2024.
•    Average costs rose in the quarter to October at a rapid pace (+60%, from +65% in the three months to July; long-run average of +20%). Costs growth is expected to remain elevated in the three months to January (+60%).
•    Average domestic prices rose in the quarter to October, at a slower pace relative to July (+11%, from +23% in the three months to July), whereas average export prices were flat (0%, from +8% in July). Domestic prices are anticipated to rise again in the next three months, at a faster pace (+24%), while export prices are expected to grow slightly (+4%). 
•    Stocks of raw materials rose in the three months to October (+9%), whereas stocks of work in progress were broadly flat (+3%), and stocks of finished goods declined slightly (-6%).
o    Manufacturers expect stocks of work in progress to rise in the three months to January (+6%), stocks of raw materials to be flat (0%) and stocks of finished goods to fall again (-4%). 
•    Numbers employed were broadly flat in the quarter to October (+3%, from -14% in the three months to July), marking the first time headcount was reported to have not fallen in two years. Manufacturers expect employment to rise in the three months to January, at a modest pace (+10%). 
•    Manufacturing competitiveness deteriorated across all major markets in the three months to October. Competitiveness worsened in the UK (-20%, from -4% in July). Competitiveness in non-EU markets also deteriorated (-17%, from -8%), whereas competitiveness in EU markets declined at a broadly unchanged pace (-18%, from -17%).
o    Competitiveness is expected to worsen again in the three months to January, particularly in EU markets (-21%), followed by non-EU (-19%), and UK markets (-15%).