U.K. Industrial Orders Rebound But Remain with a Net-Negative Assessment

The Confederation of British Industry (CBI) industrial trends survey for September registers an improvement in total orders. It moved up to a September reading of -2 from -7 in August. The reading had been +8 in July. The three-month average is zero, and that's against a six-month average of +10, and a 12-month average of +16. On that perspective, we can see that the assessment for orders has been deteriorating despite the small improvement month-to-month from August to September.

However, historically, the readings for orders tend to be weak. As a result, the -2 September reading is still strong-to-firm when measured against data from 1991 forward; September has a 75th percentile standing on that timeline. Over this period, orders have been higher than -2 only about one-quarter of the time. Over a more recent timeline, from 2015 forward, the ranking is at its 47th percentile, slightly below its median. The median for ranked data occurs at the 50th percentile. In broad historic context, this is still a relatively firm number; however, when compared to data since 2015, this is only an ordinary reading.

Export orders mimic the headline. They register a -8 in September which is an improvement from -12 in August; but August was unchanged from July. The August reading for export orders is stronger than its -11 three-month average although weaker than its -4 net reading for the six-month average and its -3 value for its 12-month average. The rank standings for export orders also mimics the rank standings for total orders. The ranking from 1991 is at a 70th percentile mark and the standing from 2015 has a slightly stronger but not too different at a 51st percentile mark. Once again, the orders are strong relative to the broader sample and weaker relative to the more recent sample since 2015 and the ranking on that latter period still registers near the neutral 50% reading.

The rating for the stocks of finished goods is stronger in September, up to +6 from +2 in August. This compares to a -7 reading in July and weaker readings over three and six months, but the much weaker 12-month average is at -9. The stocks readings are always hard to evaluate since rising inventories could be a sign of confidence or could be a sign of sales not going very well, leading to unintended inventory accumulation.

Looking ahead, industrial output volume for the next 3 months has a pronounced drop, falling to -17 compared to -2 for August. July had a + 6 reading making the three-month average -4; that compares to a six-month average of +8 and a 12-month average of +18. The outlook has deteriorated quite sharply over this period with September being a watershed, with the bottom falling out of the outlook. In fact, the ranking for the September value for the output outlook is in the bottom 5.8 percentile of its historic queue of data back to 1991. That's an extremely weak reading; over the more up-to-date comparison from 2015, the ranking is still in the bottom 7.7 percentile, not much different. Industry in the U.K. appears to be battening down the hatches and preparing for a storm ahead, a common theme among western European economies.

One reason for this dismal outlook on production may be the outlook for prices. Average prices expected over the next three months stepped up slightly in September to a reading of +59 from +57 in August. Like the data above, these are still net diffusion readings but with much higher values. Those recent readings compare to a reading of +48 in July. Compared to the sequential averages, the September reading is only slightly lower than the +61 reading for the six-month average and the +65 reading for the 12-month average. Given how much inflation has progressed, the outlook for inflation in the U.K. does not appear to have improved very much. There appears to be a lot of inflation pessimism there and that pessimism is also reflected in weak expected output.

The data for industrial production (IP) lag the CBI survey data which are quite up to date since it's only late-September and we have a September estimate in the CBI already. Industrial data on IP are up to date through July and on that basis the monthly July change in industrial production in manufacturing was zero. The change over three months was +0.4% at an annual rate; there's a roughly 2% annual rate decline over six months and a 1.1% rate of increase over 12 months. The performance of manufacturing industrial production during this period has been weak with a tangible decline. The ranking for the overall growth rate for manufacturing industrial production leaves it in its lower 36th percentile over both ranking periods since 1991 and from 2015. That’s a lower one-third reading and the economy is still growing- some fear recession lies ahead.

The broader conditions The Bank of England continues to raise rates and the U.K. continues to have an inflation problem. Europe continues to struggle and has a threat from energy availability and yet the ECB has continued to raise rates to fight its inflation problem. The Federal Reserve in the U.S. has been raising rates strongly; it meets today, and another rate hike of significant magnitude is expected. It is not surprising that in this environment the ADB (Asian Development Bank) has cut its outlook for growth among developing Asia. ADB has cut its outlook for growth from what was 5.2% back in April to 4.3%. Its outlook for next year is trimmed less severely to a 4.9% pace from what had been 5.3%. Globally growth is slowing as central banks try mightily to turn the trend of inflation lower. Organizations like the Asian Development Bank and the World Bank are concerned about the impact on developing economies globally and what a recession might do to them if one emerges. Even without recession the impact of rising interest rates and exchange rate changes and the resulting financial fallout is creating problems for those economies now.

The state of play in the U.K. The U.K. PMI value for manufacturing from S&P Global is up to date through August. It falls to 47.3 in August from 52.1 in July. It had been sequentially stronger, registering a local peak value of 58 in November 2021. Riding the cyclical roller coaster back a little further, there was a peak of 65.6 in May 2021. What we are seeing now is a clear progression from what was the COVID recession to recovery and the ‘recovery phase. In this phase, governments provided a lot of help to the private sector; there was the progression of inflation as a result of the aftermath of COVID, various supply restrictions, too much government help, soaring energy prices, and war in Ukraine that simply exacerbated these conditions.

The outlook Since central banks for a prolonged period were focused on trying to prevent economic collapse during COVID and took their eye off the price stability ball, central bankers are forced to go back to their main job, to figure out how to fix the mess that they helped to create. There's a great deal of hand wringing and gnashing of teeth over what needs to be done and what the risks are going to be from a policy to reduce and contain inflation. As always, the politicians are in the mix, warning about harming the economy, especially in those places where elections are pending. However, economics offers only crude tools. There are not elegant solutions when inflation ramps so high above current interest rates after central banks let it go. Models sometimes offer a policy mix without as much pain, but such paths are impossible to find outside econometrics – in the real world.

The real situation Historically when inflation gets to be as high as it is globally, individual countries, regions, and the world economy wind up in recession. That’s it. Central banks have had extremely limited success in trying to stop rising inflation without creating recession especially after inflation has risen to the kinds of heights that we are seeing now… (1) compared to target and (2) compared to the level of interest rates that prevails. Inflation is the enemy of central banks. They're not looking to reduce it; they're looking to eliminate it, until it gets down to target. It's much like the Biblical tale of David and Goliath. David was not looking to disable Goliath; he was looking to kill him and solve the problem permanently. Central banks have the same charge with respect to inflation. There seems to be some denial about that- as if continued mild inflation might be acceptable. It’s not.