U.K. CBI Business Optimism Improves for Q3 (Still Weak)

Business optimism in the U.K. improved in the third quarter to a reading of -21 from a very low reading of -34 in the second quarter. Yet, the U.K. economy continues to be under a great deal of pressure and all the risk factors that had been in play remain in play from the Ukraine-Russia War to the ongoing COVID issues, to the central bank raising interest rates. But optimism is not as negative in the third quarter as it was in Q2. Its standing has improved to a lower 23 percentile level from a lower 9 percentile level previously. While there is considerable improvement month-to-month, it's still a very weak report.

Export optimism improved in the third quarter compared to the second quarter although expectations for capital expenditures for buildings remained at the same reading as in Q3; assessments of capital expenditures for equipment moved higher. Capital expenditure expectations for both categories are quite high with 85-percentile standings for buildings and with a 91-percentile standing for equipment.

The number employed over the last three months backtracked slightly in Q3 but still has a 94.5 percentile standing with the trend still and a 96-percentile standing although it also backed off in the third quarter. New orders from three months ago fell back to a +11 reading from +22 in the second quarter marking a 73-percentile standing, but the volume of orders expected three months ahead improved; that response has only a 57-percentile standing. Domestic orders versus expectations show a stronger standing for current orders compared to expectations; the same is true for foreign orders over the last three months versus expectations for three months ahead. Expectations for domestic and foreign orders each show sub-median readings for three months ahead.

The output metric fell back in the third quarter to a +6 reading from +19 to a standing at its 55th percentile; expectations for output for the period ahead also fell to a reading of +6 from +17 in the second quarter but that yields a low standing in its 39th percentile below its historic median.

Finished stocks record a little assessment change between quarters with the standing in the 90th percentile while the three-month-ahead assessment for stocks drops to a -10 reading from +1 to a below-median 42.5 percentile standing.

Next is series of readings on the cost of output: domestic orders and foreign orders show extremely high readings for both the current and the expected values over the past three months as well as for the next three months. All these metrics have high 90th percentile standings. Clearly inflation is expected to be engaged.

On balance, the quarterly CBI series shows an improvement in expectations although still a great deal of weakness and clear expectations that inflation is going to continue to be a factor in the period ahead.

Potential limiting factors Table 2 below chronicles several lists of factors that are potential limiting factors in the period ahead. For output, orders and sales are not expected to be issues. They are expected to hold up. But there are concerns about the availability of inputs: skilled and other labor. Plant capacity and the availability of materials also are current concerns. Despite the Bank of England raising rates, for the time being, credit & finance continue to produce results that suggest assessment near their historic median.

Among factors that are likely to limit export orders, delivery delays rank high as do concerns about export quotas or license restrictions and concerns about political or economic conditions. Prices and credit are not the causes of concerns.

Looking ahead at factors likely to limit investment (Capex), there are concerns about the cost of financing in the future and concerns about labor shortages. For the time being, at least, there is no substantial uncertainty about demand or the adequacy of returns on investment. There are no pressing concerns about the ability to internally generate funds or to tap external financing.

Although there are concerns about recession and slower growth globally, especially for Europe a major trading partner for the U.K., and for the United States, we do not see these concerns emerging in the CBI survey of likely limiting factors.

There's little concern about orders or sales volumes; instead we see concerns related to resource availability like labor inputs materials and concerns over lags and capacity. These are still peak cycle concerns rather than the sort of concerns that emerge in recessions. While inflation is high and it’s high globally, at this point the CBI respondents don't see prices as a problem. However, they are concerned apparently about capacity and about delivery lags. Looking ahead, beyond three months, there are more concerns about the potential costs of finance and still concerns about shortages of labor. This quarter the look-ahead CBI series seem to be unconcerned about the issues we generally expect to see mushroom when prospects for recession increase.