K Industrial Production, October 2022: The latest manufacturing output data published by the Office for National Statistics (ONS) showed growth of +0.7% compared to September. This was led by pharmaceuticals and transport equipment which was partly off-set by a reduction for basic metals & metal products. However, month-on-month, there was growth in only 6 of the 13 sub-sectors reported in the ONS bulletin. Output remains -0.9% below the pre-pandemic level (February 2020).
October was the first positive month for manufacturing output since May; September was flat but there have been only 3 positive months in the past 17 (plus 3 more unchanged) since the most recent peak of output in May 2021. However, we prefer to track trends for the latest 3 month block rather than the more volatile monthly series but this takes the edge off the positive news for the October; total manufacturing output in the latest 3 months (August, September and October 2022) was -1.8% lower than in the previous 3 months (May, June and July 2022) and -5.5% down on a year earlier (August, September and October 2021).
At the sub-sector level, output of the capital goods group also fell in the latest 3 months with a reduction of -2.0% compared to the previous 3 months but it was +1.5% higher than in the same period a year ago. In October, output of this group was 97.0% of the pre-pandemic level.
The bright spots among our key customer industries were automotive and aerospace which both continued their recovery albeit in different ways. For the automotive industry, output in the latest 3 months was +1.1% higher than in the previous period but -4.3% lower than a year earlier. Following a dip in August, output has grown strongly in the following two months and the October value is the highest since November 2021 but it is only 79.7% of the pre-pandemic level.
For aerospace, the profile over the past 3 months is the opposite with output slipping in both September and October following a good August. However, the latest 3 months taken together were still +0.5% higher than the previous 3 months period but -4.1% down on the same months in 2021. Despite slipping, output in October was just above (100.3%) the pre-pandemic level.
The news for the other two key industries is gloomy. Output of the machinery industry has fallen for each of the past 5 months and for 8 of the past 9 months and, as a result, activity in the latest 3 month block was -3.8% lower than the previous period and -11.5% below the level a year earlier. Despite these negative trends and thanks to a strong recovery in 2020, the October figure is still 8.2% above the pre-pandemic level.
It is a similar story for metal products where output has fallen for 7 consecutive months and in 11 of the past 13 months which means that output in the latest 3 months was -5.7% lower than the previous 3 months and -13.6% down on a year earlier. This industry had a smaller post-pandemic bounce so October output was only 79.7% of the pre-pandemic level.
You can download the ONS Statistical Bulletin on the Index of Production from their website at https://www.ons.gov.uk/releasecalendar (12 December) or request it from MTA; we can also share our analysis of the key industries and sub-sectors if that would be of interest.
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UK GDP, October 2022: The monthly GDP data which is based on the output data shows a significant but not quite complete reversal of the fall that was recorded in September with the +0.5% (+0.54%) increase in October not quite balancing the -0.6% (-0.61%) fall in the previous month.
We have already noted the improvement in manufacturing although industrial production as a whole was only flat as a result of a sharp fall in output of gas, electricity and water supplies (the latter including sewerage).
The construction sector was also positive with an increase of +0.8% thanks growth in both new work and repair & maintenance activity. This was the 4th consecutive month-on-month increase in construction output and the overall level of sector output is now at its highest level since this series began in January 2010.
However, the main interest in this set of data comes from the service sector where output increased by +0.6% following the fall of -0.8% in September. The latter was mainly due to the impact of the Queen’s funeral where, unlike most public holidays, large parts of the retail and hospitality industries were either closed or operated on a much restricted level. However, a more telling metric about the current situation is that total services output in the latest 3 months (August, September and October) was -0.1% lower than in the previous 3 months (May, June and July) with output falling in 9 of the 14 sub-sectors.
The month-on-month improvement is reflected in the fact that the largest positive impact came from the wide ranging “wholesale and retail trade; repair of motor vehicles and motorcycles” group where output grew by +1.9% in October (-2.0% in September). There was also a positive contribution from “human health & social work activities” where the ramping up of the Autumn booster vaccination campaign increased output for the 2nd month running. Overall, output of the consumer-facing services is still 8.9% below its pre-pandemic peak (February 2020 for the monthly series) while all other services are +2.4% above that level.
You can download the ONS Statistical Bulletin on the monthly GDP figures from their website at https://www.ons.gov.uk/releasecalendar (12 December) or request it from MTA.
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Bank of England’s Agents’ Summary of Business Conditions – 4th Quarter 2022: At its meeting this week, the Bank of England Monetary Policy Committee (MPC) decided by a vote of 6 to 3 (with the 3 members split on what they wanted) to increase the Bank Rate to 3.5% – a rise of 50 basis points. This is a smaller increase than at its previous meeting but the MPC implied that further rate increases are likely to be implemented in the early part of 2023 – the MPC is next due to meet on 1st/2nd February.
One of the elements of their discussions was the quarterly report from the Bank’s Agents; this is based on discussions held between mid-October and late-November and generally tracks changes over the past 3 months compared to the same period last year. For manufacturing, the Agents note that output fell and they report that this reflects weak demand for retail and construction products. Demand for household products such as soft-furnishings were particularly weak.
They also note that demand for capital equipment weakened as higher energy costs and growing uncertainty weigh on investment. However, there is some good news with sectors that are less reliant on consumer demand such as IT, defence and aerospace continuing to report strong growth.
Supply chain problems continue to ease but delivery times are not back to their pre-crisis levels and some sectors, including electronics and steel are still reporting significant shortages related to the war in Ukraine. Export demand overall is flat compared to a year ago as a result of a positive picture for deliveries to the US being balanced by lower demand from the EU.
The investment outlook is poor with plans being scaled back because of weak demand, tighter financial conditions and uncertainty about the outlook. Higher borrowing costs extend the payback period for the investment and a number of contacts said that money that would otherwise have been available for investment had been tied up in stocks to help manage the supply chain problems. Some manufacturers (and consumer services firms) reported an increase in investment in automation to counter labour supply shortages.
You can access the full report from the Bank’s Agents at https://www.bankofengland.co.uk/agents-summary/2022/2022-q4 and the minutes of the MPC meeting are available at https://www.bankofengland.co.uk/monetary-policy-summary-and-minutes/2022/december-2022.