UK industrial orders fell further in October, CBI says

Industrial orders in the UK fell sharply in October, with most manufacturers stating that Sterling's fall since the referendum had a negative net impact on business, despite which business optimism staged a big recovery over the past three months.

Manufacturers were also concerned about a lack of skilled labour which might limit their output in coming months, the Confederation of British Industry said.

The business lobby's monthly and quarterly industrial trends survey of 459 manufacturers painted a mixed picture as investment intentions recovered in the quarter ended October alongside export prospects.

CBI's key monthly industrial orders subindex fell to -17 in October from -5 in September, coming in below economists' forecast of -5.

However, the quarterly business optimism balance increased to -8, from -47 in the three months to July, thus returning to its pre-referendum levels.

As a result of the fall in Sterling, unit costs rose at their fastest pace in three years and were expected to continue growing at above their long-term average over the next three months, CBI said in a statement.

There was also modest domestic price inflation, as manufacturers sought to pass on some of the cost increases to their customers.

Despite improved export demand and competitiveness, 47% of exporting manufactures said the weak pound has had a negative impact on their business.

Rain Newton-Smith, CBI chief economist, said manufacturers’ are optimistic about export prospects and export orders are growing, following the fall in sterling, however, the weaker pound is also feeding through to costs, which are rising briskly and may well spill over into higher consumer prices in the months ahead.

“Access to skills clearly remains a high priority, so manufacturers will be looking to the government to implement a new migration system that meets the needs of business while responding to clearly-stated public concerns. Maintaining a preferential route between the UK and the EU, our largest trading partner, will be important.”

A balance of 12% of firms forecast a rise in export orders over the next quarter, along with more modest growth in domestic orders (+4%) and almost a quarter said that the lack of skilled labour could limit output over the next few months.

About 27% of businesses anticipate a rise in output volumes, and 14% expect a fall, while 13% expect employment numbers to increase and 29% expect it to decline for a net balance of -15% - its lowest since October 2009.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said weak domestic demand offset the boost from exports.

He said conditions in the manufacturing had not deteriorated as rapidly as the total orders balance suggested as the balance has a very strong seasonal pattern and it has been below its 12-month rolling average in 34 of the last 38 Octobers, by an average of six points.

“Our seasonally adjusted measure of the total orders balance fell to -11 in October — its lowest level since March — from -5 in September and it is consistent with slight falls in production. The rise in the export orders balance to -6 from -10 implies that the weakness is concentrated in domestic demand.

“The quarterly balances paint a mixed picture. Although optimism has recovered to pre-referendum levels, manufacturers have cut employment over the last three months for the first time since 2010, and plan to cut jobs at faster rate over the next three months.

“The balance of firms intending to increase plant investment improved only to zero, from -5 in the third quarter, and so remained well below the +17 balance before the referendum. In short, manufacturers largely are treading water, as weakness in domestic demand offsets to the boost from the lower pound.”