Growth slows over an uncertain future A

ccording to the CBI quarterly Industrial Trends Survey, growth in manufacturing activity softened in the three months to

October this year.

The survey of 399 firms also found that optimism about business conditions fell for the first time in a year, and while sentiment about export prospects continued to rise, it did so at a slower pace. Growth in output, domestic orders and export orders also eased, though remained above their respective long-run averages.

Investment intentions for the year ahead deteriorated, with spending plans for buildings at their lowest since July 2009. Expectations for spending on new equipment also weakened. Plans for investment in training and innovation remained much firmer by comparison.

Concerns over labour shortages edged upward from already high levels. The number of respondents citing these concerns as a limitation to investment plans was at its highest since October 2013. Meanwhile, numbers employed continued to rise strongly over the past three months, and hiring intentions for the quarter ahead remain above the long-run average.

Unit costs growth picked up compared with the previous quarter, running ahead of output price inflation and indicating an ongoing squeeze on manufacturers’ margins.

Rain Newton-Smith, CBI chief cconomist, stated: “Growth in output and orders are still above historical norms, and it’s encouraging that plans for spending on innovation and training are holding their own. But we’ve seen a general softening in manufacturing activity over the past three months, with the outlook for investment becoming more subdued.

“To boost investment growth, Government should use the Budget to provide a fillip for factories through business rate reforms, including

exempting new plant and machinery from rates altogether, and switching to the more recognized CPI inflation measure rather RPI when calculating up-ratings.”

Looking at the construction sector in particular, UK construction product manufacturers are expecting slower growth in sales and activity as cost rises and slowing construction output continue to weaken market conditions.

According to the Q3 Construction Products Association (CPA) survey, 36% of light side manufacturers reported higher sales, decreasing from a balance of 55% in the previous quarter. The weaker performance in Q3, along with rising costs for raw materials, fuel and energy, echoes the slower construction activity already seen across industry data and recent surveys. It has also lowered manufacturers’ expectations for product sales in Q4. No firms on the light side anticipate an increase in sales during the October to December period, whilst 21% of heavy side firms expect sales to decline. For the year ahead, 28% of heavy side firms anticipate an increase in product sales, whilst on the light side, 33% of firms expect sales to increase. Rebecca Larkin, CPA senior economist commented: “For construction product manufacturers, the near-term outlook is being clouded by the perfect storm of a broad-based rise in input costs, slower economic growth and signs of an emerging weakness in construction activity outside of private housing.

“Overall costs increased for 90% of all manufacturers in Q3. Although the survey showed inflationary pressures are anticipated to ease slightly over the coming year, the industry has turned noticeably more pessimistic about the strength of activity in coming quarters. “New orders in construction fell to the lowest level in three years in Q2 and the survey suggests this will start to filter through to reduced activity on

site by the end of the year.”

Most construction firms are going to notice the impact of subdued economic growth, rising inflation and falling real wages over the next two years, with both infrastructure and house building key to sustaining growth.

In addition, negotiating unprecedented uncertainties as the UK leaves the EU is expected to result in little growth, with output expected to rise 0.7% in 2017 and remain flat in 2018. The latest forecasts from the CPA come at a time where any growth at all will be reliant on government’s delivery of infrastructure projects. This is likely to have a profound effect on construction output, which if not realised would lead to an industry-wide decline of over 1% in 2018. Infrastructure activity is forecast to grow 25.4% by 2019 and will be due to major projects in rail and water and sewerage, such as HS2 and the £4.2bn Thames Tideway Tunnel.

House building will continue to be a primary driver of growth, with private housing starts rising by 5% in 2017 and 2% in 2018.

In 2017 Q2, the Government’s Help to Buy equity loan accounted for 40% of new homes and has been a significant policy for supporting building activity. The additional £10bn that the Government announced for the scheme in October will continue to sustain house building, despite the slowdown in the general housing market.

The sharpest decline will be in the commercial sector, and particularly felt in the offices sub- sector as EU Referendum-induced wariness among investors has led to a sharp fall in contract awards. Office construction is expected to decline 5% in 2017, worsening to a 15% decline in 2018. This is likely to accelerate if it proves to be the case that the UK will not be part of the Single Market and financial services firms choose to transfer operations out the UK into other EU member states.

Hydratec Specialist Fluid Solutioi ns November 2017 7

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