UK manufacturing output declines again but outlook brighter - CBI

Output volumes in the UK manufacturing sector fell sharply again in the three months to July amid the Covid-19 pandemic, but manufacturers were more optimistic about the outlook, according to the latest survey from the Confederation of British Industry.

The total order book balance rose to -46 in July from -58 in June. This was below consensus expectations of -38.

The survey of 356 manufacturing firms saw total new orders fall at their fastest pace since October 1980, with domestic orders and export orders declining at record paces.

This marked the third month in a row that new orders declined at a record pace. Output dropped in 14 out of 17 sub-sectors, with the headline fall led by the motor vehicles & transport, food, drink & tobacco, and mechanical engineering sub-sectors.

On the bright side and for the first time since February, manufacturers said they now expect output in the next quarter to begin to recover.

CBI chief economist Rain Newton-Smith said: "Manufacturers continue to face extreme hardship due to the Covid-19 crisis.

"There are tentative signs of gradual recovery on the horizon, with firms expecting output and orders to begin to pick up in the next three months. But demand still remains deeply depressed.

"The Government has provided vital support to protect manufacturing businesses and jobs throughout the crisis. But firms remain very concerned about their financial situation and their capacity to invest. It is crucial for the Government to consider how it can continue to support viable firms through this crisis."

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the survey likely still understates the pace of the recovery in manufacturing output.

"The total orders balance is derived from firms reporting whether orders are above or below 'normal' levels. Firms give the same response to the survey if orders are 1% below normal or 99% below normal, so the balance is not very informative after big downturns," he said.

"Many manufacturers have backlogs of orders to work through that they were unable to fulfil during the lockdown. As a result, we currently expect manufacturing output to be just 5% below its pre-Covid level in July, a smaller shortfall than overall GDP, which we think will be about 12% below its January level."