Momentum behind the upturn has eased

For the seventh quarter running output and orders balances held firm in positive territory and responses continued to run ahead of their long-run average. But on both counts we’ve seen a steady drift down since the record highs of last autumn. Consistent with other indicators we’ve seen this year, such as the PMI, it looks like there is still more growth in store, but at a weaker pace than that seen in the second half of last year.  

Europe isn’t the market it was six months ago

There’s a couple of reasons for the loss of momentum. One of these is what’s happening in some of our key export markets. Official data on GDP growth at the start of this year and survey indicators of business activity suggest the European upturn is also now past its peak. While over half of companies in our survey still report seeing positive signs of demand from European customers, this has taken a fairly sizable step back from the two-thirds reporting solid growth in this market last quarter.

Construction-facing sectors not quite bouncing back after the bad weather

There is also quite a strong sectoral element to the weaker q2 picture. The challenges facing the construction industry have been well documented in official statistics, through the Carillion collapse and the effects of the disruptive storms in February and March. The effects of these events on the manufacturing supply chain are also clear from our survey, with sectors such as rubber and plastics and electrical equipment reporting a drop in output balances this quarter and lagging further behind other sub-sectors.

Inflation easing, only gradually

After big hikes in price balances following Sterling’s fall (now nearly two years ago), the balance of companies increasing prices on UK orders is easing – but only gradually. Recent rises in the oil price and upward pressure on other commodity prices means price balances are stickier than we were expecting. On the export side, there was a slight uptick in the balance of companies upping their prices, which looking at the sector composition of the increases, seems strongly linked to rises in commodities, particularly metals prices. 

There is still growth, and some optimism that firm expansion will continue in the year ahead

For all the pockets of slightly weaker news coming from the sector, firm-level confidence about the next 12 months is holding up. UK manufacturers continue to be reasonably upbeat in their assessment of their own growth prospects and the fact that discussions on a Brexit implemented period have been largely settled (in our domestic politics at least), is likely to offer a bit more certainty about the avoidance of a cliff edge as soon as the first quarter of next year.  

But not enough optimism for an investment splurge

That said, the global economic and political outlook (in which we include the upcoming round of Brexit negotiations) still means that confidence is somewhat fragile. That fragility is best reflected in the drop back in investment intentions this quarter. Overall the balance of companies looking at expanding investment plans is in positive territory, but even over the past year it has fallen short of where we might expect it to be given the strength of the output and orders outlook. At +10% the investment balance is at its lowest point in a year.

This plays into our subdued 2018/19 GDP outlook

A subdued outlook for investment and an export recovery that looks to have peaked (and that’s before we factor in the possibility of a US-initiated trade war….) plays into a still sub-par performance for the UK economy overall in 2018. As a consequence we’ve taken our GDP growth forecasts down to 1.2% this year from 1.5% last quarter. Our expectation of 1.3% growth in 2019 is unchanged. Martyn will be back later in the week with more detail on what’s behind our forecast downgrade.