Economic News
CBI Economic Update: NO SIGN OF IMMINENT SLOWDOWN FROM CBI SURVEYS: Three quarters after the referendum result, our surveys reinforce the wealth of other economic data which indicate that the UK economy is performing well. Business sentiment has improved and activity has continued to grow, buoyed by domestic demand and increasing appetite from overseas. However, the picture is mixed across sectors, and sterling-induced cost pressures are building across the economy, driving up inflation. At the very least, this is likely to push down on consumer spending as the year progresses, barring a notable pick-up in earnings growth.
Sentiment has improved across our surveys…
Following the UK’s vote to leave the EU, there was a widespread deterioration in business sentiment at rates last seen during the Eurozone crisis of 2011 and, in some instances, since the 2008/09 global financial crisis. With the initial shock and accompanying uncertainty having receded since then, we have subsequently seen a broad recovery in sentiment across our surveys.
In particular, we have seen a marked improvement among manufacturers, whose assessment of the current business environment climbed at the fastest pace in two years in the quarter to January. Underpinning this appears to be a confluence of factors, with higher growth in orders, output and competitiveness providing manufacturers with more favourable operating conditions.
…but Brexit concerns persist
On the other hand, sentiment in the distribution sector (which includes retailers, wholesalers and motor traders) has grown at a more subdued pace following the referendum result. In addition, retailers have turned pessimistic in their near-term expectations for the overall business environment, anticipating that it will deteriorate for the first time in four-and-a-half years. In a special question aimed at gauging the motivations for their gloomier outlook, three-quarters of retailers cited rising cost pressures as having influenced the deterioration in sentiment, whereas Brexit-related uncertainty was also a prominent concern. Sentiment is also subdued in financial services, but has stabilised after falling persistently over 2016.
Activity continues to grow
Growth shows little sign of slowing for now. Early “nowcasts” for the first quarter from the Bank of England and the Office for Budget Responsibility (OBR) point to growth coming in at
around 0.5-0.6%; a similarly solid rate of growth to that seen in the second half of 2016.
Manufacturing in particular is performing strongly. Our Monthly Trends Enquiry for March shows that total order books remain comfortably above normal levels, while export order books have improved at one of the fastest paces in the survey’s history. The quarterly survey in January highlighted strong rises in overseas competitiveness and our members are optimistic about the prospects for exports further ahead.
In contrast, there were some tentative signs of a softening in the consumer-facing side of the economy around the turn of the year. Retailers reported that annual sales volumes had contracted in January, driven by grocers whose sales fell at the fastest pace since August 2004. While there was a return to growth in February, it was tepid in comparison to the expansions seen in November and December as well as historically. Our retailing members indicate that this may partly be driven by price rises implemented at the beginning of the year, whereas the increased trading days in December due to the timing of Christmas may also have had a bearing on volumes. Similarly, the consumer services sector saw business volumes deteriorate in January at the fastest pace in nearly four years before subsequently experiencing a rebound.
The performance of the business and professional services has also been weaker: the sector saw no change in business volumes for the third consecutive quarter in the three months to February. However, their expectations for the coming quarter have turned positive for the first time since the referendum.
Building cost pressures prompt plans for price hikes
While activity seems to be holding up, this is against the backdrop of growing cost pressures. Higher costs are being felt most acutely among manufacturing firms, where the prices of imported raw materials are being pushed up by both the depreciation of sterling as well as by recovering commodity prices.
Meanwhile, a one-off question posed to retailers found that 85% of them were facing higher costs compared with a year earlier, making it easy to appreciate why it was the most commonly cited driver of the deterioration in their sentiment. Higher import costs were a key driver, with some members reporting that currency hedges made before the referendum have now largely unwound, causing costs to climb in a very immediate way due to the pound’s weakness. However, a number of other issues are also in play: the introduction of the National Living Wage, revaluation of business rates and the apprenticeship levy among them.
Amid these growing cost pressures, firms have raised their domestic prices at a faster pace, led by the distribution sector, and further hikes are in the pipeline. Expectations for selling price inflation climbed to the highest in a decade among business and professional services, whilst among consumer services they hit a nine-year high. Manufacturers are also increasing domestic prices, albeit at a more moderate rate than they have historically.
Investment intentions have perked up
The softening in planned capital expenditure seen straight after the referendum result has seen a broad-based reversal across our surveys. As manufacturing output growth has gained pace, capacity pressures have emerged, leading the proportion of firms working below capacity to drop to the lowest level since July 2015. This has spurred manufacturers to invest in expanding their capacity, with the highest proportion of survey respondents on record reporting this as a motivator for investment. Planned spending on buildings and plant for the year ahead have both risen further above their respective long-run averages, whereas so-called intangible investments in product & process innovation and training & retraining have firmed to the highest in a year.
Investment intentions have also recovered in the services sector as well, with an improvement in planned capital expenditure on IT contrasting with more subdued intentions across other areas. While the services sector hasn’t experienced the same rebound in investment intentions as the
manufacturing sector, planned capital authorisations are holding above their respective long-run averages. But in contrast, retailers’ year-ahead investment intentions turned negative in February following a modest improvement over the previous two quarters. Anecdotal evidence suggests that the negative outlook for investment may stem from a necessity to make savings in order to offset a greater cost burden as described earlier.
Mixed picture on hiring
Firms across all sectors expect to expand their headcount over the near-term. Manufacturers took on more staff in the three months to February after having previously cut back on staffing levels for the first time in over six years, though the proportion of firms stating that they thought skilled labour would likely limit output over the quarter ahead hit the highest level since the late 1980s. The sector has historically faced relatively pronounced skill shortages, which tend to intensify when there is an acceleration in output growth.
Employment growth has also held up among consumer services, in contrast to more moderate rises among business and professional firms (chiming with the trends in activity in both sectors). However, near-term hiring intentions have softened for consumer services, whereas business & professional services anticipate that recruitment will accelerate. Hiring has weakened most markedly in the retail sector, where firms have cut staff at the fastest pace for two years and a broadly similar reduction in staffing levels is expected in March. This may be driven by an expectation that volumes will soften amid a weakening in household spending, as well as a reflection of a broader need to make savings in order to counter the elevated cost pressures outlined previously.
In terms of medium to long-term hiring intentions, anecdotal evidence across all sectors suggests that there is a considerable amount of uncertainty among firms who are generally waiting for greater clarity on the outcome from Brexit negotiations before committing to any changes to the size and composition of their workforce.
Wage outlook stable
All sectors are anticipating similar levels of wage growth over the next year, at an average of around 2.0-2.5%, suggesting that planned pay awards haven’t been upwardly adjusted for the higher inflation that is expected in 2017. Indeed, many of the businesses we speak to still judge salary increases of between 2.0-3.0% as being the norm given the heavier cost burden that they are facing as well as the highly uncertain outlook for business. However, the upward pressure on pay from higher inflation is very much an issue on our members’ minds and could well have a bearing on pay awards further ahead, with the majority of respondents expecting to match or exceed RPI in 2017 according to the CBI/Pertemps Employment Trends Survey in December.
Slower growth in the pipeline
Despite the good news on growth since the referendum vote, the outlook remains clouded. Costs are rising strongly, which is starting to push through to factory-gate prices and consumer prices generally. Given that there is little sign that wages are rising to offset, consumer spending is likely to slow.
The improvement in investment intentions since the immediate aftermath of the referendum result is welcome, but these are likely to be highly sensitive to the negotiations with the EU following the triggering of Article 50. And while some partial offset may come from a boost to net exports owing to the weaker pound, experience from the weakness of sterling over 2007-09 suggests that that any overall benefit to trade may be rather mild. Taken together, this suggests that we’re still likely to see slower growth further ahead.
Bank of England Agent’ Summary: Moderate rates of activity growth had continued overall. Retail sales volumes growth had eased. It was expected to slow further during the year ahead as the fall in sterling fed through to higher prices, reducing households’ purchasing power. In contrast, export volume growth had picked up. That was due to the fall in sterling and stronger world growth.
- Investment intentions had picked up, pointing to modest growth in spending in the year ahead. That reflected continued moderate demand growth and less uncertainty about economic prospects, particularly in the near term. But a lack of visibility of the United Kingdom’s future trading arrangements was weighing on longer-term plans for some contacts.
- The fall in sterling was being passed through into higher manufacturing output and consumer goods price inflation. Business and consumer services price inflation had edged higher.
The links to the Agent Summary of Business Conditions as published by the Bank of England: http://www.bankofengland.co.uk/publications/Documents/agentssummary/2017/q1.pdf.
Other News
Brexit: On Wednesday the Prime Minister will trigger article 50 to begin the process of our exit from the EU and on Thursday the Great Repeal Bill White Paper is expected. She will make a speech in Parliament, and a letter will be sent from No10 to the European Council with the UK Government’s objectives.
Sugar Reduction(1): It is likely that PHE will publish the final sugars reduction guidelines for each of the relevant nine food categories this week.
Sugar Reduction(2): The European Food safety Authority (EFSA) will publish a scientific opinion on how much sugar can be included in a healthy diet, by 2020.
Folic Acid: As expected, the bill setting out to amend the Bread and Flour regulations to include folic acid has had its second reading date changed (because of the huge list of bills also being read that day) to 12 May. It probably won’t get read then either. In any case if it does get read, the Queen’s speech and State opening of Parliament is expected to be the week after, so all private members bills not all the way through effectively get killed off and have to start afresh.
Front-of-Pack Nutrition Logo: The World Health Organisation(WHO) has praised France for its front-of-pack logo that “clearly stood out as the most consumer-friendly scheme””. The French logo assesses the global nutrient profile of the food, attributing one colour accordingly, while the UK traffic light scheme gives a colour on an individual nutrient basis.
Apprenticeship Levy: The Apprenticeship Levy is due to come into effect on 6 April. The Government has now provided a final list of the training providers online. So you can now see the providers who can offer apprenticeships to levy paying employers to help you make informed selections. Available here: https://findapprenticeshiptraining.sfa.bis.gov.uk/ Furthermore, if you have not already done so, can you register on the Digital Apprentice Service (now known as Apprenticeship Service). Employers will need to set up an account to be able to see your levy credits and top ups from May 2017. To set your account up, found here: https://manage-apprenticeships.service.gov.uk/ For those still needing to register, the Skills Funding Agency have created a video to guide you through the process – https://www.youtube.com/watch?v=XDYEtj16E38
Pesticide Residues in Food: The latest pesticide residues in food quarterly monitoring results for the third quarter of 2016 are available at the link below. As expected bread has been tested and will have been tested in the fourth quarter of 2016 so we can expect these results in due course. No concerns have been raised about residues in bread by the Expert Committee on Pesticide Residues in Food. https://www.gov.uk/government/publications/pesticide-residues-in-food-quarterly-monitoring-results-for-2016