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U.K. Manufacturing Orders Decline at Fastest Pace for Three-years says CBI; Here's Why

© freepeoplea, Adobe Stock © freepeoplea, Adobe Stock

- U.K. manufacturing outlook darkens in recent quarter says CBI. 

- Cites "Brexit uncertainty", although export downturn also at play.

- Comes as Brexit talks stall and the U.S-China trade war heats up.

U.K. manufacturing orders declined during the quarter to October according the latest Confederation of British Industry (CBI) Industrial Trends survey, while expectations for output growth have fallen to their lowest level for three years. 

A majority of companies responding to the survey said new orders from the domestic market had decline by 10% during the quarter to October, while orders from the export market have fallen by 8%.

Moreover, although 10% of firms said they are more optimisitc about the general business situation than they were three months ago, 25% said they are more pessimistic, leaving a balance of -16% for business sentiment.

“Planned investment is being scaled back in the face of deepening Brexit uncertainty, so it’s vital that the Chancellor incentivises manufacturers to spend in areas that will help them become more productive," the CBI says.

This shift toward pessimism among companies has been fastest since July 2016, the month after the Brexit referendum, and the CBI suggests it has everything to do with the current state of the Brexit negotiations. 

The survey does, after all, cover a period in which negotiations over terms of the U.K.'s withdrawal from the EU have entered a pivotal stage and are once again roadblocked. Some say the negotiations will go down to the wire.

“These figures are concerning and must not be taken lightly. Ongoing uncertainty around Brexit has made for a particularly tough quarter for the UK’s manufacturers," the CBI adds. 

Negotiators from both sides of the English Channel failed to reach agreement on terms of the U.K.'s withdrawal from the EU in time for the European Council summit that concluded on October 17.

Disagreement over the so called "backstop" solution for managing the Northern Irish border in the event a deal on the future relationship cannot be struck at a later date has once again stymied progress.

"Manufacturers will also be deeply concerned with the Government’s proposals for a post-Brexit immigration system, which, by dismissing the importance of low-skilled labour to the economy, risks worsening skills shortages," the CBI says.

Failure in the talks has led markets to begin contemplating the risk of an exit from the EU without any agreement whatsoever, which would see the U.K. default to trading with the bloc on World Trade Organization terms.

Most economists say this would deal a blow to the U.K. economy so it is not difficult for observers to see how business sentiment may have deteriorated last month and throughout the summer.

“Manufacturers’ main priority for the coming months will continue to be for the Government to protect frictionless trade with the EU after Brexit. The Autumn Budget also presents an excellent opportunity for the Chancellor to give the sector a welcome shot of optimism,” the CBI says. 

However, despite the deterioration of Brexit talks, the survey also covers a quarter when President Donald Trump has imposed tariffs on more than $250 billion of China's annual exports to the U.S.

Trump is also threatening to target an additional $267 billion of Chinese goods trade with similar levies in the hope the nation's leadership will change course on its industrial strategy and "unfair trade practices". 

Tariff actions from the White House have pitted the world's two largest economies against each other in a so called "trade war", which most economists say will dent growth the world over.

The CBI makes no direct mention of this in its survey yet the export orders decline was a significant, albeit minority, driver of the downturn in overall new orders.

International Monetary Fund (IMF) officials cut their forecasts for global growth earlier this month, citing the likely adverse effect of the President Trump's international trade policy. 

And a phenomenon similar to the decline in U.K. sentiment has been observed in manufacturing sectors elsewhere in Europe, notably in the bloc's largest member, Germany.

The Zentrum fur Europaische Wirtschaftsforschung (ZEW Institute), an influential economic research firm, said its index of investor sentiment also fell to its lowest level since August 2012 in October.

The ZEW index has fallen significantly during the summer and the magnitude of the October decline was the largest of any survey since the outcome of the Brexit vote, which is similar to what was observed in Tuesday's CBI report. 

"The most important [point] of the survey participants reason given lies in the fears of a intensifying trade conflict between the US and China. A consequence of this would be a further clouding development [of] German exports and overall economic growth in Germany," the latest ZEW survey says, once translated from German. 

The CBI says it is; "The UK's premier business organisation, providing a voice for firms at a regional, national and international level to policymakers. Our purpose - helping business create a more prosperous society." 

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