Director’s Weekly News – Week Commencing 18th February 2019

Economic News

CBI Economic Brief

This month at a glance…

• Business surveys chime with official data showing that growth edged down a gear in Q4.

• CBI surveys report an uptick in stockpiling, partly driven by Brexit concerns.

• MPC downgrades outlook in face of heightened uncertainty and global slowdown.

• UK labour market continues to tighten, driving the strongest real wage growth in two years.

 

CBI forecast highlights

• UK economy continues to grow at a subdued pace: The economy is estimated to have grown by 1.4% in 2018 and we expect growth of 1.4% in 2019 and 1.6% in 2020.

• The prospect of a “no deal” Brexit remains the most immediate risk to the UK economy, and would likely lead to both greater financial market volatility and weaker economic growth than in our baseline forecast. GDP growth would likely be more volatile in the near-term too, particularly if firms turn to stockpiling or confidence becomes more volatile. Survey evidence indicates that stockpiling is already happening in manufacturing and distribution.

 

• Global economy continues to expand, but it appears that growth has peaked. This reflects factors including the maturing of markets such as China, higher oil prices, tighter global financial conditions, and the impact of rising trade tensions on business confidence. The slowdown is likely to be gradual, so expansion is still expected at a relatively healthy 3.7% in 2018, 3.4% in 2019 and 3.5% in 2020.

 

Surveys indicate slower growth in Q4 after the summer boost

Official data showed that the UK economy grew by 0.6% in the third quarter of 2018, supported by the warm weather, which provided a boost to a broad range of sectors. A number of firms have benefitted, with our anecdote suggesting that particularly those in food and drink, construction and tourism have witnessed an improvement in sales over the summer.

However, the CBI’s growth indicator and Markit PMIs suggest that momentum shifted down a gear in Q4 while monthly official GDP data also showed subdued rates of growth in October and November, with a fall in December. Q4 CBI surveys have seen weaker growth in distribution relative to Q3, while volumes have fallen in services and retail, compared to robust growth in Q3. Meanwhile, manufacturing growth was steady in Q4. A number of members have cited that trading conditions were flat towards the end of 2018. This was supported by official data released on the 11^th February which suggested that GDP growth edged lower to 0.2% in Q4 2018.

Growth to remain lacklustre at the start of 2019

We expect UK growth to remain similarly subdued at the start of 2019, with the CBI’s growth indicator suggesting that private sector activity remained unchanged in the three months to January. The stagnation in overall volumes reflected falling services volumes and stagnant distribution volumes, offset by continued (but slower) manufacturing growth. Within distribution, retail volumes continued to fall for the third consecutive rolling quarter. This chimes with the latest composite Markit PMI which also showed stagnant activity in January, indicating the weakest growth since the EU referendum.

The quarterly Industrial Trends Survey revealed that manufacturing output continued to grow at an above-average pace in the three months to January, but total orders were flat. Meanwhile, domestic orders were steady and export orders recovered only slightly from a drop in October. The survey showed heightened concerns about overseas political/economic conditions as a constraint on export orders, likely related to Brexit. Investment intentions for the year ahead remained noticeably negative, as business sentiment dropped at its fastest since the EU referendum.

Surveys find uptick in stockpiling, partly driven by Brexit uncertainty

The Distributive Trade Survey indicated that the level of wholesale stocks in relation to expected sales surged in the year to January, its highest since February 2008. Manufacturing stocks also saw an uptick in the January survey, remaining above average. Respondents suggested that this was partly driven by Brexit, with firms feeling it’s necessary to build stocks ahead of the UK’s departure from the EU. A number stated the need to build up stocks as the majority of their raw materials come from the EU market, with multiple concerns about logistics post-Brexit. Other drivers include a general increase in order books for some firms, some ordering in stocks in preparation for seasonal business, while others commented on the role of unexpectedly weak demand.

 

“Fog of Brexit” and global slowdown weigh on MPC’s outlook

“Super Thursday” saw the Bank of England’s Monetary Policy Committee (MPC) vote unanimously (9-0) to maintain rates at 0.75% as expected. The MPC’s forecast for GDP growth was downgraded in the near term due to greater Brexit uncertainty and weaker global economic activity and he Bank also expect lower inflation in the near-term due to the recent fall in global oil prices. In the event of a smooth Brexit outcome, growth is expected to recover towards the end of the forecast period (2021) as uncertainty fades and looser fiscal policy supports domestic spending. However, the MPC remained vocal about domestic cost pressures firming, and their medium-term outlook for inflation was largely unchanged, as the effect of lower prices fades away and domestic demand exceeds the subdued rate of supply growth. The MPC continued to hold their position that in the event of uncertainty persisting for longer than expected, or a no-deal Brexit, they would either increase or decrease interest rates depending on how Brexit ultimately affects the economy (specifically, on the balance of how much demand hit is affected relative to supply potential).

Real wage growth strongest in two years – but productivity slumps

The labour market continues to tighten with the employment rate now at 75.8%, the joint-highest since comparable estimates began. Meanwhile, the unemployment rate remained once again at 4.0%, its joint-lowest since 1975. A recent CBI Brexit survey found that 93% of businesses said that their organisation’s retention and recruitment of staff has been negatively impacted by Brexit. As a result, a number of firms have cited that they are now more cautious in their approach to recruitment. Real regular pay increased by 1.1% on a year ago, the strongest growth in almost two years, but still weak relative to pre-crisis norms. With inflation expected to fall further and the labour market pushing up wage growth, real wage growth is expected to continue to strengthen (please see the CBI December economic forecast for more information). Nevertheless, annual productivity growth is well below the pre-financial crisis trend rate of almost 2% per year, limiting the extent of any significant sustainable pickup in wages.

 

Meanwhile, skill shortage concerns remain elevated across out general economic surveys. This is particularly the case in manufacturing where increased labour shortages appear to have driven strong wage growth in the sector. According to member anecdote, the reasons for staffing problems continue to be split between specific sector issues, such as difficulties attracting young people into certain roles in construction and logistics, while other firms are more affected by external factors such as Brexit. A number of service companies state that they are investing in AI and automation to help address skill shortage problems. Other firms hope that reforms to the apprenticeship levy will help, with a number of businesses stating that they have been unable to access the funds in the past.

 

Brexit-Campden BRI has put together a ‘Brexit Hub’ to provide ongoing regulatory support for the sector. It highlights and summarises key regulatory events and developments throughout the Brexit process. The hub provides a guide to current discussions and considerations regarding the potential policy implications of leaving the EU. It’s curated by their expert and highly experienced food law advisers and will be regularly reviewed and updated as more information is made available during and after the withdrawal period.

 

Brexit: Food industry trade associations, including FoB, had written to Michael Gove requesting delays in government consultations during the continued period of uncertainty surrounding Brexit.

Other News

Packaging and Waste: Nevertheless DEFRA has published a consultation on packaging and waste, covering extended producer responsibility, the proposed tax on plastic packaging materials and a Deposit Return Scheme(DRS) system.  The closing date for the consultation has been extended until mid-May (12 weeks instead of 8) which may be of some help.

Groceries Code Adjudicator(GCA)- the GCA’s sixth annual groceries sector survey is currently open and runs until 23 April. You can complete it by following this link – www.yougov.com/gca.

 

The survey allows you to give honest feedback on your experience of how retailers are complying with the Code and is a very important source of information, allowing the GCA to collect a wide range of views on current Code-related issues facing suppliers.  GCA is again looking for a very strong response from suppliers.

 

All views are important so please be frank and open when you complete the survey and encourage suppliers to do the same.

 

Responding should take no more than 10 minutes and all answers are collated and analysed by YouGov.

 

All the information provided is treated in strict confidence and no one will be identified without their consent.   Your response will help me determine where to focus my attention in the year ahead.

 

When forwarding the survey, please use the link in this email rather than opening the survey and copying the link in your browser.

 

You can hear the results at the GCA 2019 Conference on 24 June in Westminster, London. Register your attendance at the GCA conference here.