CBI's UK industrial production survey shows mixed picture

UK industrial production in recent months increased at the fastest pace since the mid 1990s, the CBI has found, although its headline balance of total orders was lower than forecast.

The CBI industrial trends survey recorded a balance of +10 more respondents saying their total orders were above normal than below, which was short of the forecast for a balance of +12 and down from the previous +16.

On a brighter note, business optimism about the current situation for July rose marginally to a balance of +5 from the previous +1 when it had been forecast to be flat.

Volume of output in the three months to July rose to a balance of +31, the highest since 1995, from +22, while the balance of export orders and domestic orders both eased slightly.

Output expectations, which economists said has a fairly good historical relationship with the official measure of manufacturing output, rose slightly from +27 to +28.

Manufacturers’ investment and employment intentions also have recovered, with investment intentions improving across all areas.

The strong levels of output growth among UK manufacturers was prompting the strongest hiring spree seen since July 2014, said Rain Newton-Smith, the CBI's chief economist.

"Cost pressures are easing and firms are upbeat about the outlook for export orders," she noted.

“It’s great to see the benefits from the decline in sterling for UK exporters feeding through. But the flipside is the broader hit to consumer spending power across the economy from stronger inflation, which is likely to have fuelled the slowdown in the economy in Q1 and is expected to pull down growth in Q2.”

Andrew Wishart at Capital Economics was heartened by the fairly upbeat tone the survey despite the headline total orders balance falling.

He said the improvement in output expectations was consistent with quarterly manufacturing output growth accelerating to 1.0% at the start of the third quarter, "up sharply from the -0.1% we expect to be revealed in the preliminary estimate of Q2 GDP released tomorrow".

Meanwhile, he also noted that the quarterly survey balances also revealed further reason to expect the recent weakness in manufacturing to prove temporary, with an improved business optimism balance and investment intentions also strengthened.

"And although the export expectations balance dipped from +30 to +13, suggesting that the benefits from the weaker pound may be fading somewhat, the expected prices balance fell sharply from +29 to +9. This provides another reason to expect the rise in inflation to be temporary."

The problem, said Sam Tombs at Pantheon Macroeconomics, "is that the CBI’s survey has been far too upbeat over the last six months".

He noted that manufacturing output was officially down 1.1% in the three months to May compared to the previous three months, while Markit’s manufacturing survey has been more closely aligned with the official data than the CBI’s survey in the past and has weakened significantly recently.

"Manufacturers in June were the least optimistic about future production since November 2016, according to Markit.

"The CBI’s survey has a small sample size and it is not seasonally adjusted, despite showing a strong seasonal pattern. Its measure of orders also reflects the number of manufacturers reporting them to be above or below “normal”, which is a moving target. For now, then, we’re inclined to place less weight than usual on the CBI’s survey."