This article is more than 1 year old

This article is more than 1 year old

A double whammy of Brexit uncertainty and a slowdown in global trade has seen order books in Britain’s factories shrink at their fastest pace since the financial crisis, the CBI has said.

Urging the next prime minister, confirmed on Tuesday as Boris Johnson, to strike a deal with the EU, the employers’ organisation said industrial output also fell in the latest quarter, for the first time since the spring of 2016.

The CBI’s industrial trends survey showed that business optimism had fallen, investment intentions had worsened and firms had run down the stocks built up ahead of the original 29 March Brexit deadline.

According to the survey, manufacturers believe an improvement in the political outlook over the coming months will lead to a pickup in orders and output.

Rain Newton-Smith, the CBI’s chief economist, said: “As the tailwind from stockpiling weakens, clouds are gathering above the manufacturing sector. It’s being hit by the double blow of Brexit uncertainty and slower global growth.

“With orders, employment, investment, output and business optimism all deteriorating among manufacturers, it’s crucial for the new prime minister to secure a Brexit deal ahead of the October deadline. And get on with pressing domestic priorities, from improving our infrastructure to fixing the apprenticeship levy.

“This will allow firms to focus on investing in new technology and tackling the skill shortages that plague this sector.”

Weary firms gear up to hit the Brexit pause button – for a second time Read more

The CBI’s gloomy survey came as a leading Bank of England policymaker said Brexit risks could scupper plans to raise interest rates even if the bank’s forecasts suggested the economy was ready for a hike.

While those forecasts assume a smooth Brexit, Michael Saunders, a member of the Bank of England’s monetary policy committee, told Bloomberg that the outcome was uncertain. Its comments suggested that economic projections by the central bank may not be enough to convince Saunders – recently one of the more hawkish MPC members – to vote for a rate rise in the coming months.

Interest rates were cut to a record low of 0.25% in the aftermath of the EU referendum but have since been raised twice to reach 0.75%. Saunders voted in favour of the Bank of England’s last two hikes, but said that economic forecasts had little influence on those decisions. “The link from the forecast to my actual vote was quite loose,” he said.

While markets have started pricing in the possibility of a no-deal Brexit and subsequent interest rate cuts, the Bank’s central forecasts are still based on a smooth exit from the EU.

Saunders’ comments raise the prospect of an interest rate cut in the case of a no-deal Brexit, the prospect of which has risen since Theresa May’s resignation as prime minister. Boris Johnson, announced on Tuesday as May’s successor, has said that Britain will leave the EU on 31 October, “do or die”.

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Saunders’s fellow Bank policymaker, Gertjan Vlieghe, warned earlier this month that crashing out of the bloc without an agreement could result in a prolonged period with interest rates at a record low level of almost zero. Vlieghe said he would be prepared to cut borrowing costs aggressively in the event that the UK leaves without a transition deal.

However, should Britain secure an agreement, Saunders told Bloomberg that rates would probably rise over time.

In a separate speech, the Bank’s chief economist, Andy Haldane, said that it would take more than the current sluggishness of the economy to persuade him to cut interest rates.

“I would be very cautious about considering a monetary policy loosening barring some sharp economic downturn”, Haldane said in Scunthorpe.

Despite “Brexit-related volatility”, Haldane said the UK’s underlying growth rate was steady, the high employment rate was pushing up pay and there were signs that the housing market had bottomed out.

The Bank’s chief economist said there was a risk that low interest rates could become normalised and that it was “important that monetary policy is not a prisoner of its past, that the monetary cavalry are not called at the first whiff of grapeshot, that a dependency culture around monetary policy is not allowed to develop.”

The rate-setting monetary policy committee will publish its next set of economic forecasts on 1 August as part of its quarterly inflation report. The City expects borrowing costs to remain unchanged.