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Rate cut less likely as factory optimism hits five year high

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Factory output is down, but confidence is higher

Optimism among manufacturers is at a six-year high as the Brexit headwinds dissipate and despite falling output.

The CBI reported a huge swing from October last year when 44% felt negative about the outlook to 23% being more positive.

It is the largest quarterly turnaround since 1958 and may reduce the likelihood of the Bank of England reducing interest rates next week. The hike took analysts by surprise: most had pencilled it a balance of -20%.

Following strong jobs figures from the Office for National Statistics earlier this week, all eyes will now be on Friday’s Purchasing Managers’ Index (PMI) data.

The CBI’s findings contrast with the latest quarterly survey from the Scottish Chambers of Commerce in partnership with the Fraser of Allander Institute which shows confidence levels remaining weak, with manufacturing, retail and tourism all negative on the outlook.

It reports business confidence on a downward trajectory over a series of quarters, and significantly below the five-year average.

However, analysts will treat the the SCC survey with some caution as it was undertaken in November and December when Britain was in the grip of the political stalemate over Brexit.

With Boris Johnson securing a large majority and the withdrawal debate now over, business has achieved a greater level of certainty than existed last year.

The CBIs’ survey of 300 manufacturing firms, conducted after the election between 16 December and 13 January, represents the post-election period. It found business optimism had improved significantly and at the fastest pace since April 2014. Export sentiment continued to fall, but was noticeably less gloomy compared to last quarter.

Investment intentions also improved following particularly glum expectations in October, with a record proportion of firms expecting to authorise capital expenditure in order to expand capacity. But a record proportion of manufacturers were concerned that a shortage of labour could constrain investment spending over the year ahead.

The improvement in manufacturers’ sentiment belied poor activity over the quarter. Output volumes in the three months to January fell at a similarly quick pace to last month, largely reflecting a sharp fall in motor vehicles output. This marked the eighth month in a row of flat or falling output volumes.

Total new orders fell at the quickest rate since the financial crisis, reflected by a similarly fast fall in domestic orders. However, orders and output are expected to recover slightly in the quarter ahead.

Moreover, headcount fell in the quarter to January at their fastest pace since the financial crisis, but firms expect the rate of decline to slow next quarter. 

The boost to optimism in the manufacturing sector is very encouraging given the difficult environment that firms have faced in recent months

Tom Crotty, CBI

Anna Leach, CBI deputy chief economist, said: “With business optimism improving at its fastest pace since 2014 and some of the squeeze on investment plans lifting, it’s clear manufacturers are entering the new year with a spring in their step. Firms are now planning to invest more in plants and machinery, which will ultimately help increase capacity and output. 

“However, this boost to sentiment belies poor trading conditions over the past quarter, with output and orders still declining. If we are to build on this rebound in optimism among UK manufacturers, it is crucial for the UK and EU to establish a trade deal that supports growth in this sector.”

Tom Crotty, group director at INEOS and chairman of the CBI Manufacturing Council, said: “The boost to optimism in the manufacturing sector is very encouraging given the difficult environment that firms have faced in recent months.

“However, it is clear that the sector is not yet out of the woods in terms of performance, which means that this optimism could prove to be short-lived unless the government use their newfound strength to help address underlying issues holding back manufacturers.  

“Manufacturers are ready to work with the government to make real progress on key domestic challenges such as increasing productivity, addressing skills shortages, improving sustainability and tackling climate change.”

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