U.K. Factory Orders Remain Solid...If Clueless

U.K. order books continue to hold ground, according to the industrial trends survey issued by the Confederation of British Industry (CBI). Their net position slipped in August to 7 from 11 in July and 13 in June. Their August level is below their past 12-month average (of 8), but it is still a solid reading. The queue percentile standing is at its 91st percentile, a relatively strong position despite some recent slippage.

As Brexit negotiations have raged in the background and made little progress, U.K. export orders have been rock-solid with a net reading of 9 for three months running and in four of the last five months. Export orders are below their 12-month average of 11 but with an even stronger queue standing than overall orders at their 94th percentile.

Stocks of finished goods have a net reading of zero and have been slipping; stock level ratings are below their 12-month average and have a queue standing only in their 2nd percentile.

Looking ahead, output value expected over the next three months is increasing. The net reading is at 20, up from reading levels in the past few months and a tick above its 12-month average of 19. While that reading and trend is positive, the queue standing of the gauge is a bit lower than for orders in its 81st percentile, roughly a decile of standing points lower.

Average prices expected three-months ahead log a net reading of 15, a slightly stronger reading than in recent months but below the 12-month average of 20. The standing of the reading is in its 79th queue percentile, a relatively firm position.

The Brexit ultimatum
Just about everything that is done or reported for the U.K. these days is seen through the lens of Brexit and filtered by the question of what happens next. The reporters to the survey see current conditions as quite solid and rank the future- out to three months- as still quite positive and solid. On this short leash, British industry is doing well. But what about after Brexit? Since there are no deals yet cut and the Irish border seems to be a giant sticking point, it is hard to tell.

However, in a bit of unrelated news, the U.K. fiscal budget balance ballooned to post its largest surplus for July since 2000. While the BOE may be marking time to its next rate increase and set to withdraw stimulus, the fiscal situation puts more policy flexibility into the hands of the government.

Having some policy flexibility as the Brexit negotiating period drags on is good news. But more important is that the U.K. get a Brexit deal and provide a clear framework for the conduct of business in the future. As things stand, I’m not sure that we learn too much from the CBI surveys since businesses can’t really know what lies ahead. They are not in position to handicap the future with any degree of accuracy and certainly to the extent that they do it, they do it without much foresight.