Industry prepares to scale back post Brexit

Its survey of 506 UK manufacturers indicated that in the aftermath of the referendum result, optimism about the business situation over the past quarter had fallen at the fastest pace since January 2009.

Prior to this, the sector had made some recovery during the three months to July, reversing a slowdown in activity around the end of 2015.

It’s important now for the new government to steady the ship with a plan, and a clear timetable, for negotiating the UK’s relationship with the EU

Rain Newton-Smith, CBI chief economist

“Manufacturers picked up the pace over the second quarter, with output growing solidly,” said Rain Newton-Smith, CBI chief economist. “We’re also seeing encouraging signs of a boost to export competitiveness from a weaker sterling."

But he added it was clear that a “cloud of uncertainty was hovering over industry, post-Brexit”.

“We see this in weak expectations for new orders, a sharp fall in optimism and a scaling back of investment plans,” said Newton-Smith.

The survey revealed that only 5% of firms said they were more optimistic about the general business situation than three months ago, while 52% said they were less optimistic.

The outlook for the next three months looks set to soften, with expectations for growth in total new orders among those surveyed at their lowest since January 2012.

Output growth is also likely to ease and headcounts are expected to fall slightly, the CBI report said.

On the upside, as the value of sterling falls, export orders are forecast to rise at a faster-than-average pace according to 21% of respondents, outstripping the 11% expecting them to fall.

However, concerns over economic and political conditions abroad as a "constraint on exports orders" were at their highest level since 1983, survey respondents indicated.

“It’s important now for the new government to steady the ship with a plan, and a clear timetable, for negotiating the UK’s relationship with the EU,” said Newton-Smith. “This, along with a renewed focus on industrial strategy, will help give firms the confidence they need to grow and create jobs.”

The CBI study followed on the heels of the IHS Markit UK Composite Output Index, released last week based on data compiled from purchasing managers.

According to IHS Markit, the index revealed that the UK economy had begun the third quarter with manufacturing output and new orders both falling for the first time since the opening quarter of 2013.

It said the weaker performance during July was especially striking when looking at the month-on-month movements in output and new orders in both the manufacturing and service sectors.

The Composite Output and the Composite New Orders indices fell by 4.7 and 6 .8 points, which it said marked the steepest drops registered in the series histories.

It said a number of companies had linked this to ongoing uncertainty both before and since the EU referendum, with reports especially prevalent among service providers.

However, new export business rose for the second straight month and to the greatest extent for almost two years, mainly linked to the sharp drop in the sterling exchange rate.

The downside of the exchange rate was a steep rise in manufacturers’ input prices, mainly due to higher import costs, said IHS Markit.