The July CBI survey suggests that the UK manufacturing sector had a healthy start to the third quarter, but manufacturing survey results have been appreciably stronger than recent official data. The outlook for manufacturing appears mixed and the July CBI survey pointed to a marked easing of price pressures, which fuels hope that UK inflation is close to peaking.

By Howard Archer, Chief Economic Advisor to the EY ITEM Club:

The July CBI industrial trends survey appears largely encouraging. While the total orders balance dipped to +10% in July, this was from a near 29-year high of +16% in June.

The slowdown in orders was mainly due to softer foreign demand as the export balance fell to a five-month low of +2%  from +13% in June. However, the quarterly survey shows that manufacturers are at their most upbeat for four decades over the prospects for future export orders. Output expectations remained elevated in July, reflecting still healthy overall orders.

The balance of manufacturers reporting that their output was up over the past three months jumped to +31% in July from +15% in June and from +22% in the April quarterly survey. This was the strongest level since January 1995.

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Quarterly survey shows stronger investment and employment intentions

A notable feature of the quarterly CBI survey is that manufacturers’ investment intentions picked up in the July quarter despite current economic and political uncertainties, while there was also a strengthening in employment intentions.

Easing price pressures

The survey pointed to a marked easing of price pressures which fuels hope that UK inflation is close to peaking, news which will go down well at the Bank of England. Specifically, the balance of manufacturers expecting to increase their domestic prices over the next three months fell back to +9% in July from +23% in June, +29% in April and a peak of +32% in February.

Manufacturing survey results in much stronger than data from the Office for National Statistics

A notable feature of 2017 so far has been that manufacturing survey results have been appreciably stronger than hard data from the Office for National Statistics. Survey results from the CBI and purchasing managers point to the manufacturing sector seeing a clear expansion in the second quarter.

However, it is highly likely that when second quarter GDP data is released on Wednesday, it will show that manufacturing output contracted in the second quarter. The latest data shows that manufacturing output fell 0.2% month-on-month in May, which was the fourth drop in five months. Manufacturing output was down 1.1% in the three months to May compared to the three months to February.

The outlook for manufacturers looks somewhat mixed

Despite the largely upbeat July CBI survey, the outlook for manufacturing appears mixed. On the domestic front, increased prices for capital goods and big-ticket consumer durable goods, diminished consumer purchasing power, and economic and political uncertainty look likely to hamper manufacturers.

On the positive side, the overall substantial weakening of the pound and improved global demand should buoy UK manufacturers competing in foreign markets. The weakened pound could also encourage some companies to switch to domestic sources for supplies, which may help manufacturers of intermediate products.

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