UK CBI industrial trends and what it might mean for markets
17:18, 25 January 2022
The Confederation of British Industry (CBI) Industrial Trends survey, which measures the economic expectations of manufacturing executives in the UK, said UK output volumes in the quarter to January grew at a slower pace than in December.
However, it said that growth still remained firm compared with the long-run average but costs grew at the quickest pace for decades.
The survey of 236 companies, shared in a press release with Captal.com, found that output volumes increased in 10 out of 17 sub-sectors, with growth mostly driven by the food, drink and tobacco sub-sector.
Cost and price pressures
It was also highlighted that the manufacturing sector continues to face intense cost and price pressures with firms reporting average costs in the quarter to January growing at their quickest rate since April 1980. Moreover, firms said they expected costs to grow at a similar pace over the next three months.
“Increasing costs are continuing to feed into higher prices, with average domestic prices growing near previous quarter’s record pace and export price growth at its quickest since April 1980. Both domestic and export price growth are expected to accelerate in the next quarter,” the survey said.
Meanwhile, the survey found that total new orders in the quarter to January grew at a faster pace compared to October, with the acceleration driven by faster growth in domestic and export orders.
It said manufacturers expect total new orders growth to slow in the next quarter, reflecting an easing of domestic and export orders.
Supply chain woes
The ongoing supply issues also continue to bite the sector, with the share of firms citing skilled labour shortages as a factor likely to limit output next quarter rising to its highest since October 1973 - and concerns regarding other labour near the previous quarter’s record high.
Meanwhile, the proportion of firms citing materials/components availability as a potential limiting factor declined from last quarter’s multi-decade high but remained elevated by historical standards, the survey found.
Looking ahead to how much money firms were looking to invest, the survey revealed intentions for the next 12 months (compared to the previous 12) for plant and machinery was strong, with intentions for training and retraining also strengthening.
Firms also said they expect to increase capital spending on product and process innovation to a similar extent as the previous quarter.
Despite the challenging economic landscape, manufacturers also shared the view that output growth will pick up next quarter.
A word from CBI’s chief economist
Rain Newton-Smith, CBI chief economist, commented on the findings of the industrial trends survey.
“Global supply chain challenges are continuing to impact UK firms, with our survey showing intense and escalating cost and price pressures.
“More positively, it’s good to see firms looking to invest more in training and retraining as labour shortages continue to bite. And planned increases in spending on plant and machinery is a welcome sign of much-needed strengthening in business investment. Further fiscal measures to get more firms investing will be needed to set the UK on a long-term path to sustainable growth,” Newton-Smith said.
Impact on the markets
The CBI chief economist also noted the impact of price shocks on the markets and suggested reforms.
“Meanwhile, against the backdrop of rising energy prices, which are adding to inflationary pressures, short-term action is needed from the UK government to find urgent solutions for firms that are struggling.
“Longer term, energy market reforms are required to build resilience against future energy price shocks and create markets for renewable technologies, assisting net zero ambitions,” Newton-Smith said.
Meanwhile, Tom Crotty, group director at INEOS and chair of the CBI Manufacturing Council, said it was no surprise that manufacturers remain acutely concerned about the impact of labour shortages on their business.
“Alongside this, manufacturers continue to face rising energy costs and broader inflationary pressures amid ongoing supply chain disruptions. The government must work together with businesses to tackle these challenges as we begin to feel the effects of the cost-of-living crunch,” he said.
“On a more positive note, output continued to increase across most sub-sectors. But we must continue to push the government for more strategic direction for the sector to initiate further sustainable growth,” he added.
Gabriella Dickens, a senior UK economist at Pantheon Macroeconomics commented on the survey results.
“Looking ahead, we expect manufacturing output to return to its pre-Covid level in Q2, having undershot it by about 2.0% in Q4. Granted, Omicron appears to have weighed on manufacturers’ optimism; the quarterly business optimism balance fell to -9 in Q1, from +2 in Q4. And the additional checks on imports due to Brexit, combined with production and shipping delays in other countries that are more vulnerable to Omicron, will cause some further disruption in the near term,” she said in a note sent to Capital.com.
“But firms appear keen to invest; the investment intensions balance increased to its highest level since Q2 1988, +26, from +19. And as supply constraints ease, manufacturing output should spring back, especially since significant backlogs of work have amassed over the last year,” she added.
UK PMI manufacturing report
It comes as services and manufacturing PMIs fell below expectations on Monday for the start of 2022.
The PMI for the services sector fell in January to 53.3 from 53.6 in December - its lowest level since February last year. While the manufacturing PMI slipped to 56.9 from 57.9 in December,
The Covid-19 Omicron variant, cost pressures and staff shortages were cited as the main reasons for the private sector growth slowing to an 11-month low in January.
Leisure, travel and hospitality services were particularly affected by disruptions caused by the Omicron variant, according to the IHS Markit report.
Impact on the markets
Chris Williamson, IHS Markit’s chief business economist said that the latest numbers have some traders fretting that the Bank of England (BoE) may not raise rates for a second month.
However, he noted that PMI was also being affected by inflationary pressures and that should sway it, with markets expecting a move higher to 0.50%.
“With inflationary pressures remaining elevated at near-record levels, this all adds to the likelihood of the Bank of England hiking interest rates again at its upcoming meeting,” he said.