CBI Industrial Trends Survey, October 2022: The results from the latest CBI Industrial Trends Survey (ITS) suggest that orders and output are still falling in the three months to October but that employment is still increasing despite the downturn in business and the fact that concerns over a shortage of skilled labour are at an almost 50-year high.
Before we go into the detail, it is worth noting that the data collection period for this survey ran from 26th September (the Monday after the ill-fated mini-budget) to 12th October (just before Kwasi Kwarteng resigned as Chancellor). This period was the height of the economic volatility and also means that although badged as “October”, the results really refer to trends in September and the 3rd quarter.
Output in the 3 months to ”October” fell at broadly the same rate as in the 3 months to “September” and is a little below the long-run average. Of the 17 sub-sectors in the ITS, 11 showed a fall in output with the largest declines in “paper, printing & media” and “timber & wooden products”. There is a little good news here in that of the major elements of manufacturing, only investment goods saw an increase in output over the past three months. The outlook for the coming three months (effectively the 4th quarter of the year) is more positive with respondents expecting output volumes to increase modestly with investment goods sharing this outlook.
A more worrying result is that orders also fell in the latest three months with both domestic and export demand contracting. Both home and overseas orders are still above their long-run average levels but it is export activity that is the weaker of the two trends. Respondents to the survey expect another contraction in orders in the coming 3 months – a view that is somewhat at odds with the positive expectation for output.
With cost and price pressures remaining significant, it is somewhat surprising that employment was reported to have increased at the fastest rate since October 1973, with aerospace, chemicals and building materials seeing the fastest growth. The share of firms saying that a shortage of skilled labour is likely to constrain output over the coming 3 months also reached its highest level since October 1973.
At our Forecast Seminar last week, we highlighted the investment intentions indicators from this survey an indicator to watch and this is where the data collection period really becomes relevant. The balance for the question about spending on plant & machinery remained positive (and well above the long-run average), although at a noticeably slower rate than in recent surveys – overall, lower as we might have expected but not as bad as perhaps feared given the economic turmoil at the time of collecting the data.
However, this is reflected in the fact that reports of uncertainty over demand as a constraint on investment increased to its highest level since the January 2021 survey (effectively Q4-20), although it is still below the long-run average; similarly, inadequate net return ticked up quite sharply but is below its average level. On the finance side, there is not much sign of a problem in accessing finance and while “cost of finance” is above its long-run average, it is virtually unchanged from the already elevated level seen in July which does not suggest a significant problem yet.
The other useful piece of data from the quarterly surveys is the indications on capacity utilisation. The current rate of operations as a percentage of full capacity eased back to its lowest level since the April 2021 survey but this is now on its long-run average and the change is consistent with the fall in output. Similarly, the percentage of firms working at less than full capacity increased compared to 3 months ago but despite being back to the level we saw in the July 2021 survey, this measure is still below its average level.
You can get the Press Release of the CBI ITS from their web-site at www.cbi.org.uk/media-centre (25 October) or request it from MTA – we can also provide a summary of the results and some charts around the investment intentions data updating those from our Forecast Seminar.
Flash Purchasing Managers Index, October 2022: The flash manufacturing sector Purchasing Managers’ Index (PMI) for the UK showed another sharp fall to stand at 45.8 – this is its lowest level since the initial pandemic months. This came despite a slight improvement in the output element of the index calculation although, at 45.6, this is still firmly negative; we are still seeing a number of firms reporting that supply shortages are holding back production. For manufacturers, new orders fell especially sharply with the most rapid decline in export business for 2½ years. The manufacturing PMI was also lower because of a reduction in jobs for the first time since December 2020.
In the Euro-zone we see a similar further reduction in the overall manufacturing PMI – in this case to 46.6, a 29-month low – but here there was also a fall in the output element; this was the 5th consecutive month with a negative indicator for output and, apart from the initial pandemic months, this was at its weakest since July 2012 in the Euro-crisis. The weakest industries seem to be those where energy use is highest – chemicals and basic metals. The fall in manufacturing orders was at its sharpest pace since April 2009 (again excluding the height of the pandemic).
At this stage, we only have separate reports for Germany and France and these show that it is the former where most of the decline has occurred, although the latter was broadly flat at a low level. In Germany, the overall flash manufacturing PMI fell significantly further into negative territory (at 45.7 from 47.8), accompanied by a very sharp reduction in output which stood at 42.5 (from 47.0 in September). As well as weaker demand – new orders were at their weakest since May 2020, led down by export demand – high energy costs are weighing on output. Counter-intuitively, manufacturing employment increased although this can often lag behind the cycle as it takes time to recruit new employees.
In France, the overall flash manufacturing PMI was only slightly lower than in September (47.4 from 47.7) and the output element edged up, although like the UK, it remains firmly negative at 44.2 (43.3 in September). The negative output in France is put down to lower orders and raw materials shortages, while the sharp fall in orders was blamed on high stock levels at customers, rising prices and slowing market conditions. French manufacturers also reported an increase in employment.
The only other countries to have flash PMI readings are Japan and the USA. In Japan, the flash manufacturing PMI ticked down as both output and orders fell at a slower pace than in September and cost pressures remain high with the rate of output price inflation accelerating to a new record high. The flash indicator for the US manufacturing sector fell to 49.9, its first negative reading since 2013 (apart, of course, from the initial pandemic months). This came despite a very slight improvement in output which remains above the crucial 50 level, although not by much. However, orders fell back into contraction territory following a small improvement in September, in part because the strong Dollar is leading to higher export prices and a consequent fall in export orders.
These reports are available on the “PMI by S&P Global” website at https://www.pmi.spglobal.com/Public/Release/PressReleases or on request from MTA.
European Commission Economic Sentiment Indicator and Capacity Utilisation, October 2022: The European Commission (EC) draws from a range of surveys to construct confidence indicators for six sectors of the economy and then uses five of these (financial services is the exception) make up its Economic Sentiment Indicator (ESI). The other point to note is that, like the CBI survey above, although labelled as “October 2022” or “Q4-2022”, the data collection period was mainly in that month so the data really refers to September or Q3-22.
The ESI fell again in October in both the Euro-zone and the EU as a whole and is at its lowest level since November and August 2020 respectively. This was driven by the manufacturing and services sectors which was only partly offset by a small improvement for retail trade and consumers (although this is from a very low level), while construction sector confidence was flat. Financial services confidence fell very sharply.
The fall in industry confidence was concentrated in a significant weakening of total order books and an increase in stocks of finished products (although this is not necessarily a bad thing in some circumstances), balanced a little by an improvement in expectations for production in the coming 3 months. It should be noted, however, that there is a degree of inconsistency in these assessments – can output increase if order books are significantly lower? There are two other questions that are not included in calculating confidence; the respondents appraisal of output over the past 3 months fell slightly but export order books were stable.
There is some variation in the ESI for the major European economies with declines in Germany and Italy, a slight reduction for Netherlands, a stable reading for France, a small increase in Poland and a strong improvement in Spain. Another measure of strength is whether the ESI is above or below its long-run average; across the EU, only two countries – Croatia and Cyprus – have an ESI greater than 100 (the ESI is based on the long-run average) although they are joined in this position by North Macedonia who, along with the other EU accession countries, are also part of the survey.
As this is a quarterly survey, we also get the data for capacity utilisation for manufacturing. There was a modest decline in the EU with a larger fall for the Euro-zone although both measures are still above their long-run average level whether measured from 1985 or 2000.
For the larger economies, there was a sharp fall in capacity utilisation in France and Spain with a more modest reduction in Italy and Germany was only fractionally down. However, comparing with the long-run average gives a different picture with France well below the trend level, Spain slightly down, Germany a little higher and Italy still well above their average. This matters because it is not valid to compare numbers for different countries and the best comparison comes from looking at their relative historical level of capacity utilisation.
The UK is no longer part of this analysis and the measure we have is slightly different to that produced by the European Commission – most notably, the UK data is not seasonally adjusted. As we noted above in reporting on the CBI survey, capacity utilisation here fell compared to the previous survey and is right on the long-run average.
You can download the EC report and statistical annex from their web-site at https://ec.europa.eu/info/business-economy-euro/indicators-statistics/economic-databases/business-and-consumer-surveys/download-business-and-consumer-survey-data/press-releases_en or you can request it from MTA.