UK manufacturing sector seeing beginning of slowdown, CBI trends show

UK manufacturers enjoyed strong domestic and export demand in the first quarter but see a slowdown ahead, according to an industrial trends survey.

Total manufacturing order growth eased to +4 in April from +8 in March, the CBI Industrial Trends survey revealed, which was slightly weaker than the consensus expectation of +5 or +6.

Output expectations balance more than halved to +16 from +36, while the quarterly business optimism balance declined to +1 for the second quarter from +15 in the first, well below the consensus forecast of +12 and below levels two years ago.

Manufacturers said new orders were likely to increase more moderately in the near-term due to a predicted slowdown in domestic demand outweighing export orders growth.

On the plus side, the CBI said the survey of 397 manufacturers, which was conducted before Theresa May's snap election announcement last week, recorded domestic orders in the three months to April growing at the fastest pace since July 2014, while export orders grew at the fastest in six years, especially in non-EU markets, due to the weak pound.

But soft sterling also saw costs soar at their strongest rate in six years, keeping the manufacturers’ pricing balance in April modestly below February’s highest level since April 2011.

Hiring intentions for the next three months were said to be muted.

Investment plans also softened, particularly those for buildings and plant & machinery, with machinery investment at its most negative for nearly six years.

The slightly softer tone of April’s survey suggested that the manufacturing sector started Q2 on a fairly weak footing, said Paul Hollingsworth at Capital Economics.

He noted that the survey can be quite volatile from month to month and, while the business optimism balance fell, it remains above its long-run average of -5 and above its average a year ago of -8, while the quarterly export prospects balance shot up to indicate that the drop in the pound is still having substantial positive effects for manufacturing exporters.

"Overall, then, we remain optimistic that the manufacturing sector should perform well this year, and should help to offset some of the slowdown in consumer spending."

As manufacturers are likely to suffer whatever the outcome of Brexit negotiations — either imposition of trade barriers or a rise in sterling - Sam Tombs at Pantheon Macroeconomics said this was leading them to hold back from investment.

Howard Archer at IHS Markit said the challenges facing the manufacturing sector are picking up and will likely to intensify as the year progresses.

"Prices for capital goods and big-ticket consumer durable goods, diminishing consumer purchasing power and likely increasing business concerns and uncertainties over the economy look likely to increasingly hamper manufacturers," Archer said. "It also appears that consumers brought forward purchases of big-ticket items in late-2016 in anticipation of rising prices over the coming months."

If purchasing power continues to diminish, consumers will be increasingly less able to buy big ticket consumer durable items over the coming months, he added, with the 1.4% quarter-on-quarter fall in retail sales volumes in the first quarter pointing to consumers now markedly reining in spending.

"Demand for capital goods will likely be constrained as business confidence is likely increasingly pressurized by slowing UK economic activity and by mounting uncertainties over the Brexit process now that Article 50 has been triggered and likely difficult negotiations with the EU come increasingly to the forefront. Significantly higher prices charged by manufacturers for capital goods will also likely constrain demand."