Economic news

CBI economic summary

• Q1 GDP growth was revised up a touch to 0.2%, from 0.1% in earlier estimates
• Business surveys point to an improvement in growth in Q2 relative to Q1 official data
• The latest Financial Services Survey reveals flat volumes and no improvement in optimism
• Chances of a Bank of England rate rise in August increase

 CBI economic narrative

• • A recovery in global investment is helping fuel overall global, momentum – which is positive, because it makes global growth more sustainable. The CBI forecasts global growth of 3.8% in 2018 and 3.6% in 2019.
  • Q1 saw a slowdown in growth in some advanced economies, mainly attributed to temporary factors such as the weather, the timing of Easter and seasonal adjustment issues. Surveys of manufacturing activity across developed and emerging markets came down from their peaks in previous months, which may be linked to the end of the inventory building cycle. Nevertheless, even if growth has peaked, the global economy is still expected to continue to expand at a healthy pace.
  • In the UK, net trade is being lifted by the low pound and supportive global backdrop, which is supporting strong export order books in our manufacturing surveys.
  • Consumer spending continues to be squeezed by higher inflation (consumer spending makes up two-thirds of GDP), which is creating challenging conditions for consumer-facing firms – this continues to be reflected in our latest survey data, which show lacklustre conditions in consumer-facing sectors (retail, restaurants, bars, hotels, etc.).
  • Brexit uncertainty continues to apply the brakes to some areas of investment spending, particularly bigger projects, but smaller investment projects seem to be going ahead. Our surveys show that investment spending plans remain weaker than pre-referendum, but above the long-run average, supported by healthy corporate profitability, low borrowing costs, limited spare capacity and strong global activity. Brexit has also made it more difficult to recruit and retain workers according to some companies, some of whom are increasingly focussed on investing in automation, AI and training/upskilling their workforce. Agreement on a transition period for the UK is an important milestone in the negotiations, but clarity over the future relationship with the EU is still critical in order for future investment plans to go ahead.

• Weather effects aside, the economy has evolved broadly as expected in our last forecast in December. As a result, there is little change to our latest economic forecast (released in June): we expect GDP growth of 1.4% in 2018—revised down slightly from 1.5% previously, due to the impact of bad weather in Q1—and 1.3% in 2019 (unchanged from our previous forecast).

Q1 GDP growth revised up a touch

The ONS revised up Q1 GDP growth (which had been hit badly by the Beast from the East) to 0.2%, from earlier estimates of 0.1%. The upward revision was mainly due to changes in the way construction is measured, leading to construction output contracting less than previously thought. Nevertheless, the story overall was unchanged: Q1 saw the weakest growth in consumer spending for four years, with a slightly more positive contribution from net trade than seen in previous estimates. Fixed investment however was revised downward in the latest estimate ( -1.3% from 0.9%) in part reflecting methodological changes to the ONS’ measurement of investment.

The UK economy’s mixed sector performance appears to have continued into Q2 with official data for May still varied. Consumer-facing firms remain under pressure, although the latest official data for retail sales suggests that growth was supported by warmer weather and royal wedding celebrations in May. However, manufacturing production declined in April, the largest monthly fall since October 2012, while the construction sector showed no sign of improvement with the industry remaining in recession.

 Surveys point to a pick-up in growth in Q2

Business surveys indicate that Q2 growth may be slightly stronger than in Q1, leaving growth over H1 on a par with the weak outturns seen over 2017. The CBI’s growth indicator points to private sector growth of around 0.4% in Q2, following Q1 growth of 0.2%. IHS Markit/CIPS data supports CBI data indicating stronger Q2 growth. The services PMI indicated that growth picked up to the fastest since October 2017, buoyed by the strongest increase in new work since May 2017. The construction sector, which dragged on Q1 GDP growth, also saw a solid expansion in activity underpinned by greater residential work. Meanwhile, the manufacturing PMI revealed subdued growth in June and over Q2 as a whole but remained firmly in expansion territory.

 Financial services activity stable in Q2

The CBI’s latest Financial Services Survey showed that optimism about the overall business situation showed no improvement, having fallen in all but one quarter since the beginning of 2016. Overall business volumes were flat with building societies reporting that volumes rebounded, after falling in the previous quarter. Meanwhile, volumes were unchanged in banking, and grew at a fairly tepid pace in general insurance and investment management. Overall business volumes are expected to pick-up over the coming three months.

Bank of England’s MPC more hawkish in June meeting

In June, the Bank of England’s Monetary Policy Committee (MPC) voted 6-3 to keep interest rates on hold. The surprise was that Andy Haldane, the Bank of England’s Chief Economist, joined the ranks for those voting to raise rates. His change of heart boosts the chances of the MPC voting for an interest rate rise in August, in line with the CBI’s latest economic forecast.

Additionally, the MPC also gave some updated guidance on the future unwinding of QE. They now expect to start reducing the stock of purchased assets when interest rates reach 1.5%, compared to the 2% threshold in previous guidance.

There didn’t seem to be any material change in the MPC’s thinking about the economy, and their judgement on the pace of future rate rises ahead. The MPC seemed optimistic about a bounce-back in Q2 growth, particularly given a pick up in a number of household spending indicators. The MPC also seemed unconcerned by some of the weaker official data for Q2 so far, noting that much of weakness in manufacturing output in April may have reflected the lagged impact of bad weather, and a reversal of involuntary stockbuilding in Q1. The MPC also noted the recent rise in the sterling oil futures curve in the minutes, which implied a slightly higher profile for inflation in the next six months.

Other news

Food Unwrapped Tonight Channel 4 8.30pm Earlier this year the Food Unwrapped team spent a day filming in an Allied Bakeries bakery with a view to answering the question – what is it that makes wrapped bread perfect for sandwiches? The episode will also be available to watch on All 4 (www.channel4.com/programmes/food-unwrapped); we’re expecting the full feature to be around 10-15 mins.

CA to Cover Retailers Edition 16 of the GCA Newsletter, is available online at the GCA website  In the newsletter the GCA confirms that the that the Competition and Markets Authority (CMA) will soon designate additional retailers to be covered by the Groceries Supply Code of Practice. The CMA has written to a number of retailers to identify those with a UK annual groceries turnover of more than £1bn and expects to designate one or more additional retailers by the end of August.

Industrial Heat Recovery Support: The Government has published a response to its October 2017 consultation on the introduction of a new Industrial Heat Recovery Support Programme. The FDF had responded discussing heat recovery issues in food and drink manufacturing and pointed out the apparent complexity of the proposed approach. Total funding is confirmed at £18 million, to be split between feasibility studies and capital grants for project implementation. The programme will be open to applicants in the autumn.

Campden BRI launch project to investigate the effects of carbon dioxide on the shelf life of modified atmosphere packed foods: Campden BRI has launched a club project so manufacturers of modified atmosphere packed (MAP) foods can understand the effects of reducing carbon dioxide (CO2) concentration on shelf life. This will allow them to make judgements on pack shelf life that are based on scientific data.

The project will investigate the effects of different mixes of carbon dioxide and nitrogen on spoilage-related shelf life – ranging from 100% nitrogen to 70% nitrogen/30% carbon dioxide.

Three MAP packed foods will be included in the study and chosen by the club members, but these could include ready-to-eat cured sliced meat, ready-to-eat uncured sliced meat, raw meat/chicken, bakery products or a ready meal.

Dr. Roy Betts, head of microbiology, Campden BRI, said, “We have been inundated with enquiries from companies across industry asking how the carbon dioxide shortage will affect their products – in particular, the effect that a reduced level of carbon dioxide in MAP will have on shelf life. There is very little information available on the effects of reducing or eliminating the packing gas CO2 on the shelf life of food. Manufacturers have either had to continue using the concentration of CO2 needed for their established shelf life with the risk of running out, or reduce or eliminate CO2 and estimate the effect of this on shelf life. Estimating shelf life could lead to the food “spoiling” before the end of life (if the estimated life is too long) or valuable shelf life being wasted (if the estimated life is too short). We have responded by launching this club project so manufacturers can base their decisions on scientific evidence.”

Cereal Usage Figures: Cereal usage figures for April 2018 are available here: CF11 2018-04. This data is now gathered by AHDB and monthly summaries are produced, rather than the previous quarterly summaries.