Chief Executive's Weekly News for 6th January 2020

Barclays Economic Update(1): UK manufacturing output declined in dec’19 at the fastest rate since 2012 as uncertainty in global economy impacted demand. Additionally, businesses reduced stocks of goods they had produced in case of a no-deal Brexit.

The output gauge in the IHS markit⁄CIPS UK manufacturing purchasing managers’ index (PMI) declined to 45.6 in dec’19 from 49.1 in nov’19, lowest since jul’12. The broader headline PMI, which combines gauges of output, employment and orders, declined to 47.5 in dec’19 from 48.9 in nov’19.

Official data in dec’19 indicated that the UK economic growth slowed to 1.1% in q3’19, and it has not been below this rate since 2010. In addition, industrial output declined by 1.3% (y-o-y) during the same period.

Previous PMIs have overstated economic slowdowns and do not cover the public sector, where spend is rising. The job market also remained strong with unemployment rate at a 44-year low.

Uncertainty over Brexit negatively impacted the business investment in the UK throughout 2019, and the threat of a no-deal Brexit made output volatile as firms repeatedly produced and then reduced the stocks of raw materials as potential deadlines were extended.

Barclays Economic Update(2):Euro area manufacturing PMI for dec’19 revised slightly higher

The IHS markit’s purchasing managers’ index (PMI) for the euro area manufacturing sector stood at 46.3 in dec’19. According to IHS markit, output levels declined for the eleventh consecutive month, as production and new orders continued to decline. However, consumer goods recorded a marginal growth, which is its first increase since aug’19.

Chris Williamson, chief business economist at IHS markit stated that the UK manufacturers were optimistic for 2020 but a return to growth is likely to be at a low pace as new order inflows continued to decline at one of the fastest rates seen over the past seven years. He added, households provided the only source of increased demand in dec’19, underscoring that sector’s importance in sustaining economic growth more broadly but it remained to be seen how long that might last.

Bank of England Agents’ Reports

Overview

This is a summary of economic reports compiled by our Agents during October and November 2019. It generally compares activity and prices over the past three months with a year ago. The information in this publication includes a summary of information gathered by the Bank’s Decision Maker Panel survey and a survey on companies’ preparations for EU withdrawal.

Consumer demand

Growth in consumption was muted, particularly in services. Sales of big-ticket household goods and new cars remained weak.

Annual growth in retail sales values remained subdued over the past three months. Brexit uncertainty and the ongoing shift towards online retailing continued to weigh on store-based retailers.

Contacts said that the announcement of a General Election had led to a postponement of some purchases of big-ticket items such as new cars and household goods, even though it had been widely anticipated. However, spending on those items tended to be low in the final quarter of the year, so the impact on annual sales was expected to be limited.

While there was likely to be a little disruption to Christmas spending more generally on and around the election date, the overall impact on sales in December was expected to be small.

Sales of used cars were solid, supported in part by the ongoing expansion of personal contract purchase agreements in the sector. However, sales of new cars remained weak.

In consumer services, contacts said that the weaker economic outlook weighed on spending at restaurants, especially in the mid-range price bracket. Growth in holiday bookings and other discretionary spending was also weaker. However, spending on health and experiences was robust.

Business and financial services

Growth in business services weakened. Uncertainty about Brexit and the General Election weighed on activity.

The Agents’ score for business services turnover fell to its lowest in three years. Law firms reported some delays to mergers and acquisitions and commercial property deals.

Demand for public relations and marketing services fell, as companies cut discretionary spending. Spending on corporate Christmas events was also lower.

Recruitment consultants said that employers were slower to make hiring decisions.

In contrast, demand for advice on Brexit increased, for example on how to prepare for customs and regulatory changes. Litigation and insolvency work also picked up.

Changes in audit regulation helped mid-sized accountancy firms win market share from large firms in the sector.

Demand for IT and digital services grew as companies invested to reduce costs and improve efficiencies.

Reports from distribution and logistics companies were mixed. Some contacts reported growth, but those exposed to weaker sectors, such as construction, automotive and store-based retail, were less positive.

Exports of services continued to grow at a modest rate, supported by tourism, consultancy services and foreign students.

Manufacturing

Manufacturing output fell, reflecting weaker domestic and global demand.

Brexit uncertainty and subdued investment continued to weigh on manufacturing output. The Agents’ scores for total and export manufacturing output remained at their lowest for more than three years, and signalled a modest contraction.

Stockbuilding activity ahead of the October Brexit deadline was lower than it had been ahead of the March deadline.

Suppliers to the construction sector had seen a slowdown since the summer due to projects being cancelled or delayed. Output in the automotive sector continued to weaken. Contacts supplying the aerospace sector said they had been affected by weaker global conditions and trade tariffs.

The increased focus on the environmental impact of products had reduced demand for some plastics, but demand for recyclable products rose. Premium food producers reported continued growth. And there was ongoing evidence of a rise in domestic production to replace imports, for example in food.

Manufacturing exports continued to fall over the past three months. The decline was biggest in capital and automotive products, but some contacts said this was partially offset by increased demand from domestic companies substituting away from imported inputs. There was some evidence of UK exporters winning business as a result of the trade tensions between China and the US diverting demand to suppliers in alternative countries.

Construction

Construction output contracted slightly. Uncertainty led to delays in infrastructure, commercial and residential projects.

The Agents’ score for construction output fell to its lowest in 6½ years. Commercial developers were cautious and shifted towards smaller, lower-risk projects. Industrial work grew, but there was very little speculative development.

Contacts remained cautious about prospects next year, though some thought output might be supported by increased government spending.

Growth in private house building remained positive. But build rates slowed due to a weaker housing market, skills shortages and planning delays.

There was stronger growth in publicly funded housing projects. Housing associations continued to build and local authorities were increasingly active in property development. Public spending on education had also supported construction growth.

There was some evidence that growth in residential repair and maintenance had softened further.

Investment

Investment intentions remained depressed by slower global growth and political uncertainty.

Investment intentions were soft among larger firms and exporters. Contacts said that more projects were finishing than starting. And investment in the retail sector remained low due to weak sales.

However, companies continued to invest in maintenance and to replace equipment. Contacts also continued to invest in IT or automation to improve efficiency.

Contacts in manufacturing and construction thought that they would benefit from an increase in investment when uncertainty started to lift. However, there were risks around how soon that would materialise.

Corporate financing conditions

Demand for credit remained weak. Credit availability continued to be tight in some sectors.

Demand for credit remained subdued, given weak investment.

Banks’ appetite to lend to the retail, casual dining, construction and property sectors remained low.

Banks tightened lending criteria modestly for other sectors. Small and medium-sized companies reported more caution from peer-to-peer lenders. Asset-based finance was also slightly more expensive.

Larger, less risky companies continued to report that banks were keen to lend, and that non-bank finance was plentiful and cheap.

Trade credit insurers reported rising demand for cover and modest increases in claims. They were declining cover for more businesses, typically in retail and construction. Bad debts remained low in these sectors, but had risen slightly in recent months.

Property markets

There was strong demand for industrial property, but the housing market continued to be weak.

Commercial property

Occupier demand for industrial space was robust, and there were shortages in some areas.

Demand was particularly strong for logistics space near key transport routes. Contacts said that industrial rents were steady or rising.

Demand for office space was strong in larger cities but weaker elsewhere. Demand for retail space continued to decline and rents to fall.

Investment activity remained subdued among overseas investors, due to political and economic uncertainty.

Private UK investors were more active, however, finding yields still attractive relative to other asset classes.

Contacts said that investors preferred industrial over retail premises. As a result, industrial property values continued to rise, while retail property values fell.

Housing market

The housing market remained subdued, with activity dampened by uncertainty around the October Brexit deadline and the General Election.

Completions took longer to go through and more transactions fell through. However, mortgage availability was rarely given as a main reason for transactions not going ahead.

The Agents judged that housing market supply outweighed demand across most of the UK, and that this gap had been increasing. Contacts said that house prices were modestly down on a year ago in the south, and modestly up elsewhere.

Professional buy-to-let investors held back on new purchases while consolidating portfolios.

In the new-build market, increasing incentives were required to sell houses, and smaller builders were slowing their build rates.

Housing associations expected to increase their build plans from 2020 when a four-year period of annual rent reductions comes to an end.

Capacity utilisation

Slower activity meant that businesses had slightly more spare capacity than normal.

Where contacts reported having excess capacity, this was mainly in staffing. Some contacts had not fully adjusted staffing levels in response to weaker demand and were hoarding labour. This was because they hoped that the slowdown would be temporary.

In addition, there were concerns about the ability to re-hire, given the tightness of the labour market. This was particularly the case for skilled labour in manufacturing and professional services.

Companies in manufacturing, construction, hotels, warehousing and distribution reported fixed asset utilisation easing as activity slowed.

Employment and pay

Employment intentions remained slightly negative and recruitment difficulties eased a little.

Contacts’ employment intentions remained negative. A number of contacts said they were hoarding labour in the expectation of a recovery in demand in the near term. As a result, they expected their overall headcount to be unchanged.

Some consumer services businesses reported cutting headcount to lower costs and improve productivity. There was an increase in the number of firms reporting recruitment freezes. And some contacts said they were using less temporary labour.

Recruitment difficulties eased slightly, but remained elevated. Staff churn was lower due to uncertainty, and some contacts said that the prospect of a downturn had led some self-employed workers to seek permanent employment.

Contacts continued to report skills shortages in manufacturing, professional services and IT.

There was an ongoing shortage of workers to fill lower-skilled jobs in warehousing, social care, hospitality and manufacturing. This was due to the reduced availability of non-UK EU workers.

Recruitment difficulties continued to support demand for entry-level workers or apprentices to fulfil future skills needs.

Pay settlements remained in a range of 2%-3%, though awards were higher for staff on the National Living Wage and roles where there were shortages of skilled labour.

More contacts said they needed to constrain pay growth as a result of tighter margins and weak productivity growth. There were also more reports of firms freezing or planning to freeze pay, although this was not widespread.

Nonetheless, overall employment cost growth was running higher than pay growth due to companies spending more on non-wage benefits to support retention.

Costs and prices

Input price inflation slowed, and consumer price inflation eased. Margins became more squeezed due to higher labour costs.

Companies’ input price inflation eased further. This reflected slower global growth and the recent appreciation of sterling, which had reduced price pressure from imported commodities and materials. Manufacturers’ domestic output price inflation also slowed somewhat.

Business services price inflation remained modest and was mostly driven by rising labour costs. Contacts said they were able to raise prices for audit, commercial and personal indemnity insurance, and letting agency fees for landlords. Some price increases were due to regulatory or legislative changes.

Inflationary pressure for consumer goods eased a little. However, consumer services inflation was broadly steady.

Intense competition, consumers’ price sensitivity and a slight easing in non-labour input price inflation limited increases in the price of goods. Utility and fuel price inflation also slowed.

There were mixed reports on promotional behaviour ahead of Black Friday and the run-up to Christmas, but overall the expectation was that it would be similar to last year.

Food price inflation remained modest, but with pockets of upward pressure, and clothing and homeware price inflation also remained subdued.

Price inflation for new cars and larger discretionary goods eased slightly. There was modest inflation in consumer services, private sector rents, insurance, some leisure activities and regulated transport.

Due to the weaker economy, many companies were unable to pass on higher costs in full to their selling prices, even after allowing for increases in efficiency. As a result, profit margins were squeezed further.

All sectors were affected, but margins were most squeezed in construction and consumer-facing sectors. For the latter, the pressure on margins was exacerbated by the shift towards online trading, higher business rates and the impact of increases in the National Living Wage on pay.

Some contacts felt that there was little scope to absorb further pressure on margins. If margins were squeezed more, they might have to raise prices or make radical cuts to costs.

MAKE UK and Santander Food and Drink Sector Bulletin-The food & drink sector has continued to demonstrate its staying power amongst British manufacturing. The sector has steadily increased its representation in the GVA of total UK manufacturing, rising from 13% of total manufacturing output in 1999 to 16% in 2019, whilst also maintaining the most consistent growth trajectory of any manufacturing sector. The sector’s share of GVA did not experience a drop during the Global Financial Crisis in 2008, in fact it quickly gained ground raising its share by a whole percentage point, and by the end of 2009 the sector had a larger share of manufacturing GVA than it had ever had in the decade before. Partially responsible for this outcome is the food & drink sector’s inherent resilience to recession. Domestic demand for products from the sector is consistent, as food & drink products are necessary goods for individuals, so variations in “The hardiest on the field” SECTOR INSIGHTS price have reduced effects on the overall quantity demanded compared to products from other sectors – this is known as being demand inelastic. Consumer preferences will adjust during an economic downturn toward options that offer a higher value proposition. Fierce competition in the grocery retail sector keeps prices down for consumers, something discussed further on in this bulletin update, whilst also motivating these retailers to offer products that span the range of consumer quality preference. Individual retailers often meet this demand by selling products that span the consumer preference spectrum, with Sainsbury’s “Taste the Difference” and “Basics” range as an example, protecting their revenue in times of price and quality preference variation. All members of the Big 4 offer these premium and economy groupings of products as a way of addressing demand from consumers with opposed quality preferences. In the event of national financial turbulence, consumers will typically be observed cutting back on non-consumable products, such as cars and electronics, from other manufacturing sectors to a much greater degree than they do with food & drink. During the 2008 financial crash the food & drink sector saw output fall by only 1.7%, whilst the rest of manufacturing experienced a much more severe decline of 9.4%. file://787599-fdffile1/USERS_FOB/Gordon.Polson/Downloads/Sector-Bulletin-Food-and-Drink%20(2).pdf

Brexit Reminder: European Union (Withdrawal Agreement) Bill

The House of Commons debated the European Union (Withdrawal Agreement) Bill (WAB). The Bill can be read here. Emboldened by a new majority and mandate, the Government have made significant changes to the WAB since it was last introduced in October. Importantly, these changes do not change the Withdrawal Agreement, but do change the way the UK would give effect to it and the domestic arrangements. If passed, then the WAB will ratify and implement the UK/EU Withdrawal Agreement into domestic law.

Main changes to the Bill

Clause 30 has been removed. This would have given MPs a veto over the Government agreeing to an extension of the transition period beyond 31^st December 2020 or implementation period in the Joint Committee.
Clause 31 has been removed. This would have given MPs a veto over the start of future relationship negotiations with the EU and on the terms of their negotiating mandate. It would have also given Parliament a greater influence over any future relationship treaty that was subsequently negotiated.
Clause 34 and Schedule 4 has been removed. This clause provided protections for workers’ rights that would not be protected against modification, repeal or revocation in domestic law once the transition period ended.

Modifications to the Bill

Clause 20(7 allowed a Minister of the Crown to extend the life of the standing service provision (under which the UK would make financial payments to the EU) beyond March 2021. The Government has removed the power to extend that provision in the current version of the Bill.
Clause 29 provided a role for the European Scrutiny Committee in relation to developments in EU law of “vital national interest” to the UK during the transition or implementation period. New subsections 3-4 now give an equivalent role to the European Union Committee of the House of Lords.
Paragraph 10 of Schedule 2 would have prohibited the Independent Monitoring Authority from delegating certain of its functions to a committee, member or employee. Two functions that were prohibited in the last WAB are not in the new one, concern decisions to carry out inquiries or to intervene in legal proceedings. New paragraph 39 would also make it possible to transfer the functions of the IMA to another public body by regulations.
Subsection (1) has been added to Clause 26. This allows Ministers to specify the circumstances in which lower courts could depart from the rulings of the Court of Justice of the European Union (CJEU) after the transition or implementation period.

Additions to the WAB

reporting requirements to Parliament where the Joint Committee’s dispute procedures are used (new clause 30);
prohibiting any UK Minister from agreeing to an extension of the transition or implementation period in the Joint Committee (new clause 33);
prohibiting UK Ministers from using the written procedure to take decisions in the Joint Committee (new clause 35);
the repeal of statutory provisions the Government maintains are now unnecessary or spent (new clause 36); and
removing (via clause 37) the Government’s existing obligations (under section 17 of the EUWA) with regard to unaccompanied children seeking asylum in the EU who have family members in the UK. This would be replaced with a duty to make a policy statement to Parliament within 2 months of the Act passing.

Next steps

The WAB will complete its Commons stages on 7/8/9 January before passing over to the House of Lords. It is expected to pass all stages and both Houses unamended by 31 January 2020.

Food industry trends for 2020

According to report published by EHL ingredients, meat-free and plant-based innovations, health, wellbeing and mindful eating, convenience, traceability and allergen awareness are top food trends for 2020.

EH ingredients has indicated that the meat-free and plant-based foods are set to continue their popularity during 2020. Junk food including pizzas, burgers, kebabs, grilled and fried foods is likely to be become increasingly mainstream and widely available in meat-free formats within retail, restaurants, casual dining and fast food outlets, on pop up stalls and markets, as well as at food and music festivals.

Manufacturing Sector to Focus on Sustainable Development

According to Lee Collinson, national head of manufacturing, transport & logistics at Barclays, , environmental performance has to work alongside return on investment in sustainable business. Industrial activity accounted for around one third of the world’s greenhouse gas emissions and 16% of the UK’s total power consumption. However, managing energy spend and decarbonisation has escalated to become a strategic board-level priority.

In jun’19, UK became a major economy to pass laws to end its contribution to global warming by 2050. The target will require the UK to bring all greenhouse gas emissions to net zero by 2050, compared with the previous target of at least 80% reduction from 1990 levels.

According to a research published by KPMG, there has be an increase in consumers prioritising sustainability in their purchasing decision. 66% of the people in the UK stated they care more about the environmental impact of the goods they buy now as compared to five years ago, and more than half stated that it is the responsibility of manufacturers to tackle the issue.

UK Plastics Pact Report 2018/19 Published WRAP published on 17 December 2019 the UK Plastics Pact Report 2018/19. The report provides an overview of progress against targets aimed at achieving a circular economy for plastics in the UK . The highlights include: • 1 billion single use plastic items will be eliminated by the end of 2020; • Pact members are over halfway towards all their packaging being recyclable, and the UK is over halfway towards recycling 70% of plastic packaging; • Members are a third of the way towards an average of 30% recycled content in their plastic packaging; and • Remaining challenges include developing a recycling system for films and flexible packaging.