Manufacturing activity drops sharply, with fears of worse to come – CBI survey

UK manufacturers reported the quickest falls in output volumes and total new orders since 2009 in the three months to April, while business optimism plunged at a record pace. That’s according to the latest CBI quarterly Industrial Trends Survey.

The survey of 330 manufacturing firms saw domestic orders drop at a similar pace to the last quarter, while the fall in export orders accelerated. At the same time both business and export sentiment plunged at a survey-record pace.

Manufacturers expect the quick fall in output in the quarter to April – the sharpest decline since the financial crisis – to precede a sharper contraction in the next three months, with firms reporting the weakest expectations on record. Additionally, manufacturers expect both new domestic and new export orders to fall at a much faster pace next quarter.

Investment spending plans for the next year sank to a survey-record low for buildings and plant & machinery, with record proportions of firms particularly concerned about demand uncertainty and internal finance availability.

Headcount in the three months to April fell at a similar pace to January, but manufacturers expect to reduce headcount at the fastest pace since 1980 over the next quarter. At the same time, manufacturers are expecting costs to increase sharply, with nearly half of businesses expecting output to be limited by shortages of materials or components – the highest proportion reporting that since 1975.

Additional questions added to the survey in relation to COVID-19 revealed that:

  • Around four out of five firms have seen a negative impact on their domestic output.
  • Just over three-quarters of manufacturers reported a negative impact on their international output.
  • Roughly half of manufacturers reported a partial shutdown/closure.
  • Just over half of manufacturers mentioned that they temporarily laid off staff, but only one in twenty reported permanent layoffs.
  • Around two-thirds of firms have faced cash flow difficulties.

Rain Newton-Smith, CBI Chief Economist, said: “Manufacturers have taken a sharp hit during the shutdown in response to COVID-19, with this survey revealing some record lows. Despite the already-quick fall in output and orders in the quarter to April, expectations point to a faster decline in the next three months. Given the uncertainty over how long the shutdown may have to last, it’s little surprise to see businesses putting investment plans on ice as they work hard to get through this intact.

“The Government and Bank of England support schemes are vital to ensuring that businesses are able to re-open when appropriate. And ensuring those schemes reach companies on the ground swiftly is essential.”

Tom Crotty, Group Director at INEOS and Chair of the CBI Manufacturing Council, said: “This month’s survey makes for bleak reading, but the fall in activity and sentiment is not surprising given the unprecedented circumstances that manufacturers and other businesses face.

“Behind the figures are manufacturing firms doing their very best to support the nation’s efforts to suppress the outbreak, with many of them playing a key role in the production of critical equipment needed to tackle COVID-19. Therefore, it is crucial that the government continues to work with and support manufacturers during these difficult times.”  

Key findings:

Output

  • Volumes in the quarter to April (-21% from -8% in March) fell at their fastest pace since August 2009.
    • Output dropped in 13 out of 17 sub-sectors. The headline fall in output volumes was driven by the motor vehicles & transport, mechanical engineering, and food, drink & tobacco sub-sectors.
    • Manufacturers expect output to fall at a considerably faster pace in the next quarter (-67%), marking the weakest expectations for future output on record.
  • The share of firms mentioning material/components as a factor to limit output next quarter rose sharply to its highest since January 1975 (44% from 11% in January). Additionally, the share of manufacturers citing credit or finance as a factor to limit output rose to its highest since April 2009 (14% from 3%).

Orders

  • Total new orders fell at their fastest pace since July 2009 (-25% from -21% in January). Domestic orders fell at a similar pace to last quarter (-18% from -21%), while export orders contracted at a quicker pace than in January (-24% from -10%).
    • Manufacturers expect total new orders (-78%), domestic orders (-71%), and export orders (-64%) to fall at noticeably quicker rates in the next quarter. These constitute the weakest expectations on record for total new orders, domestic orders, and export orders.
    • The proportion of manufacturers citing political/economic conditions abroad as a factor to limit export orders next quarter rose to a survey-record high (68%).

Headcount

  • Headcount fell in the quarter to April (-14%), at a similar pace to January (-16%). Firms expect employment to decrease at a much faster pace (-61%) next quarter, marking the weakest expectations since October 1980.

Costs

  • Average costs in the quarter to April (+22%) grew at a similar rate to January (+20%). Manufacturers anticipate average cost growth to pick up rapidly (+52%), the strongest expectations since July 2008.

Business sentiment

  • Business sentiment plunged at a survey-record pace in the three months to April (-87%), following a post-election bounce in January (+23%). Export sentiment also dropped at a survey-record pace in the quarter to April (-84% from -8% in January).

Investment

  • Investment intentions for the next year worsened across tangible and intangible investment categories. Notably, expectations for investment in buildings (-65%) and plant & machinery (-74%) deteriorated to survey-record lows.
  • The share of firms citing uncertainty about demand (73%), internal finance shortages (43%), and an inability to raise external finance (20%) as factors likely to limit capital expenditure in the next year jumped to their (respective) survey-record highs.

Stocks

  • Stocks of raw materials and work in progress in the quarter to April fell at their quickest rates since January and April 2010, respectively.
  • Looking ahead, stocks of raw materials, work in progress, and finished goods are anticipated to fall at faster rates, with expectations at their weakest on record.

Coronavirus supplementary questions

  • Domestic output impact
    • 81% of respondents cited a negative impact on domestic output (55% significantly negative, 26% moderately negative)
  • International output impact
    • 77% of respondents cited a negative impact on domestic output (45% significantly negative, 32% moderately negative)
  • Supply impact
    • 55% of firms have faced partial shut-down/closures, 51% have experienced a hit to productivity, and 49% have faced shipping delays of materials/components/goods
  • Demand impact
    • 80% of manufacturers have experienced an impact on sales/revenue from social distancing/weaker demand
  • Workforce impact
    • 54% of manufacturers have faced temporary staff lay-offs (compared to 5% reporting permanent lay-offs)
    • 53% of firms mentioned they have implemented remote working for a minority of staff, while 39% cited that a majority of staff is working remotely
    • 43% of manufacturers reported operational disruption from staff shortages
  • Other operational impact
    • 65% of firms cited cash flow difficulties due to coronavirus disruption

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