13 November 2026: UK manufacturing sees signs of stabilisation – CBI

The UK manufacturing sector showed signs of stabilising in October, according to a survey published yesterday, although high costs continued to weigh heavily.

According to the latest industrial trends survey from the Confederation of British Industry, output volumes fell over the three months to October, with the weighted balance sliding to -10 from -4. The decline was broad-based, but was driven primarily by food, drinks and tobacco, chemicals and metal products.

However, the fall in output was slower than the year-to-date average, and manufacturers now expect output to be broadly flat over the three months to January. At -1, the forward-looking balance is the strongest since February 2025.

Total new orders also fell in the quarter, with a balance of -16. But that was a notable improvement on July’s -24, and the slowest pace of decline since April 2025.

However, overall sentiment remained depressed at -27, while average costs rose rapidly to 60, well above the long-run average of 20.

Cameron Martin, senior economist at the CBI, said: "There are growing signs of stabilisation for manufacturers, with firms expecting a prolonged period of falling output to come to an end in the coming months and anticipating their first increase in headcount in two years.

"But with orders still falling and labour shortages picking up, significant challenges remain. Stubbornly high costs are also squeezing profitability, while deteriorating competitiveness and fragile business confidence continue to weigh on investment decisions.

"Without an improvement in the underlying business environment, these tentative signs of stabilisation will struggle to translate into sustained growth."

The industrial trends survey was carried out between 25 September and 13 October, with 263 manufacturing firms responding.

The economy grew by 0.7% in the three months to September. The stronger-than-forecast performance marked the ninth consecutive rolling three-month period of growth and was an acceleration from the revised 0.6% expansion recorded in the three months to August.

Month on month, GDP increased by 0.2% in September after flat growth in August.

The services sector continued to power the economy, growing 0.9% over the quarter, while production output inched up 0.1%. Construction was the only major drag on growth, contracting 0.7%.

Year on year, the economy was 1.9% larger in the three months to September, while September GDP was 2.1% higher than the same month in 2025.

The UK economy’s role in the tech boom appears to be an important contributory factor to growth, with the ONS noting for Q3 that the ‘computer programming, consultancy and related activities’ sub-component led, expanding 4.4% q/q, and citing evidence that "many of the businesses reporting the largest increases in turnover are involved in activities related to artificial intelligence and cloud computing".

Despite the upbeat headline figures, economists warned that challenges remain. Rising employment costs, elevated energy prices and ongoing cost-of-living pressures continue to dampen business confidence and consumer demand.

The figures also come as the Bank of England grapples with a deteriorating inflation outlook, having warned that inflation could reach 5% in 2027. While the economy has shown surprising resilience, higher energy costs and borrowing rates are expected to remain a significant headwind in the months ahead.

Stuart Morrison, research manager at the British Chambers of Commerce, said: “Today’s preliminary data showing growth of 0.7% in Q3 confirms a resilient economy weathering some of the impact of global shocks. It’s encouraging that the UK outpaced Germany, France and Italy, trailing only the US among G7 economies that have reported Q3 data so far. It is the first time UK GDP has grown by at least 0.5% for three consecutive quarters since the post-pandemic recovery in 2021–22.”

“With the resilience built on the momentum of AI, it’s crucial that government and business work together to help every firm seize the technology moment.”

But dig below the headline and there are signs of an emerging two-speed economy. Investment by a few larger firms and sectors is driving growth. For the vast majority of SMEs, investment is flat. The latest survey shows just 17% of firms expect to increase investment in the coming months, unchanged on the quarter and a post-pandemic low.

Anna Leach, chief economist at the Institute of Directors, said: “GDP grew by 0.7% in the third quarter, extending the UK’s better-than-expected run this year. The economy has grown by 1.4% so far in 2026, almost double the rates that were forecast in April. That reflects three things: energy prices not having risen as sharply as feared, stronger growth in some sectors connected with AI, and business adaptability.”

The question is what happens next.

The Chancellor sought to capitalise on the third-quarter growth, telling the BBC that the efforts of both him and the Prime Minister showed that the change in leadership at the top is driving a turnaround in activity and business investment.

When challenged about the headwinds facing the economy in the coming months, John Healey was brazen enough to say there are some things beyond his control.

The AI boom driving growth is a happy coincidence for the government; if it weren't happening, the economy would already be in a dire position.

Since touching a high in mid-September, the pound has lacked follow-through as the dollar has recovered from the turmoil caused by the Republicans' rout in the midterm elections.

Yesterday it fell to a low of 1.3220 and closed at 1.3238.

"Inflation, in several ways, looks like it's going the wrong way," Chicago Fed President Austan Goolsbee said yesterday, and that has persisted for about three to four months.

"It's in the wrong, disturbing categories like services, where tariffs generally don't have a large impact,” he added. Inflation is "inching into a territory that's a historically tough spot for any central bank."

October CPI rose 0.4% M/M, hotter than the +0.3% expected. The year-on-year measure wasn't released because there was no year-ago data point due to last year's government shutdown. PCE Index inflation is estimated to increase 3.8% Y/Y, according to the Cleveland Fed's Inflation model, significantly higher than the Fed's 2% target.

Construction costs are extremely high and rising, Goolsbee said. That's often a signal of "worrying, old-fashioned overheating."

Fed policymakers are trying to determine how much inflation is coming from supply-side shocks that will eventually fade and how much is coming from overheating driven by AI investment, Goolsbee said.

The comments imply that the Federal Open Market Committee will need to hike rates further. The probability of a 25-basis-point increase at the FOMC's December meeting stands at 91.7%, and the odds of a 50-bp hike sit at 8.3%, according to the CME FedWatch tool.

Meanwhile, the US should be prepared for "serious short-term disruptions" to the job market because of artificial intelligence, which, depending on how fast it is deployed, could begin displacing workers at scale and widening inequality in favour of investors, Fed Governor Michael Barr has said.

His comments, suggesting preparation for social strains because of AI, follow midterm elections that swung partly on a backlash to the rapid AI buildout. They also precede a public Fed forum in San Francisco next Monday, hosted by a task force appointed by Fed Chairman Kevin Warsh to explore what the new technology may mean for the economy.

The implications remain uncertain, Barr said in remarks prepared for delivery at Yale University, with much riding on whether AI companies continue competing to the point that the powerful new technology becomes "a cheap and ubiquitous commodity, with gains widely shared," much like the internet has over time.

In that case, "AI could democratize access to skills and information needed for small businesses to thrive," he said.

The alternative is increasing market concentration among those who own or have invested in a handful of winning companies, with gains increasingly flowing towards owners of labour-displacing capital and continuing a downward slide in labour's share of national income.

The labour share, a rough proxy for how much of the country's output translates into wages for workers versus profits or equity income for business owners and investors, hit a record low of 52.8% in the second quarter of 2026 after holding roughly steady between 60% and 65% from World War Two until early this century as wholesale adoption of digital technology flourished.

"Some researchers believe that AI has characteristics that have, in past examples of high-tech advances, reinforced concentration of market power," Barr said.

The employment rate has been below 5% for more than five years. In the not-so-distant past, 5% was considered full employment when other factors, such as long-term unemployment and sickness, were taken into account. The latest figures show the rate slowly creeping back towards that level, something the Fed will be acutely aware of but may not have the tools to address.

U.S. existing-home sales fell to the lowest level in more than 16 years in October, as rising mortgage rates and still-elevated house prices pushed potential buyers to the sidelines.

Home sales fell 5.5% last month to a seasonally adjusted annual rate of 3.75 million units, according to the National Association of Realtors. That was the lowest level since August 2010, when sales were declining after the end of a homebuyers tax credit. Economists polled by Reuters had forecast home resales falling to a 3.85 million-unit rate. Sales plunged 8.8% on a YoY basis in October.

Home sales are counted at the time of contract closing. Last month’s sales likely reflected contracts signed in August and September.

The 30-year fixed mortgage rate jumped above 7% in late August, rising to 7.40% by mid-September, a total of 142 basis points since the U.S. and Israel attacked Iran at the end of February, data from mortgage finance agency Freddie Mac showed. The average was 7.18% last week, down from 7.24% the prior week. This was seen as a major driver of the rout Republicans suffered in last week’s midterm elections.

“Home buying is difficult when mortgage rates have climbed to their highest levels since 2000, aside from a single month in 2023,” said Lawrence Yun, the NAR’s chief economist.

Sales dropped in the South, Midwest and West. They were unchanged in the more populous Northeast.

The dollar extended its broad rally, pushing the US Dollar Index above 103.00 to a fresh 19-month high, its strongest level since April 2025. While gains moderated slightly late in the session due to profit-taking and technical resistance, the greenback finished higher against most major G10 peers.

Credit rating agency Moody's has halved its full-year GDP growth forecast for France to 0.2%, two weeks after reiterating its negative outlook as the government struggles to reduce its debt pile. Although it maintained its Aa3-Negative rating in late October, Moody's said in a report to clients on Tuesday that "political uncertainty, higher bond yields and fiscal challenges have constrained growth in 2026." The new outlook is below the government's own target of 0.5% and comes as the Bank of France recently lowered its own forecast to 0.3%.

International investors are increasingly concerned about French public debt, which stands at around 120% of GDP, one of the highest levels in the Eurozone and twice the EU limit of 60%.

At the same time, the country is facing fierce protests denouncing the surging cost of living and demanding increased spending on education and other public services. Prime Minister Sébastien Lecornu is struggling to pass a deficit-cutting 2027 budget in a Parliament where President Emmanuel Macron's centrists no longer hold a majority. To defuse the protests, Lecornu announced earlier this week that the minimum wage would rise by 1.6% to around €1,502 net per month, although this is far below union demands.

"This political instability, also evident in the current social tensions, risks hampering the French government's ability to address key policy challenges, including an elevated fiscal deficit, a rising debt burden and higher borrowing costs," Moody's said in its report.

The French economy shrank by 0.1% in the third quarter, after stagnating in the second, putting the country on the brink of recession.

For the ECB, the question is no longer whether it is concerned about France's economic difficulties, but how far it is willing to go to prevent them from becoming a broader Eurozone problem. With sluggish growth, elevated public debt and persistent fiscal pressures weighing on the French economy, investors are increasingly asking whether Frankfurt will be forced to provide indirect support.

The ECB's primary mandate remains price stability, not the financing of governments. However, policymakers are acutely aware that sharp increases in French borrowing costs could destabilise financial markets and undermine broader economic confidence across the monetary union. For that reason, the central bank is unlikely to overlook severe market stress if it emerges.

That does not mean France can expect unlimited support. Any intervention would almost certainly be subject to strict conditions and framed as a measure to preserve the transmission of monetary policy rather than as a bailout. The ECB will want to avoid accusations of monetising government debt or undermining fiscal discipline.

Ultimately, the ECB may be prepared to shield France from market panic, but it cannot resolve France's underlying fiscal and economic challenges. Those remain the responsibility of policymakers in Paris.

ECB Chief Economist Philip Lane appears ready to inherit the mantle of the ECB’s most hawkish official in the short time he has left before his contract ends. He is also expected to be the only Executive Board member to see his tenure through to the end, since both Lagarde and Schnabel will leave before theirs do.

Over recent days and weeks, Lane has been making headlines, voicing concerns that inflation may be ‘bleeding through’ into the wider economy from the energy sector, where the central bank had hoped it would remain confined.

Yesterday, Lane said interest rate decisions depend on how strongly the recent surge in fuel costs passes through to wages and other prices. He noted that energy prices have begun to reverse over the past week, a trend that could lower headline inflation while pushing core inflation higher as second-round effects spread.

Lane declined to translate the analysis into a timeline for policy moves, telling audiences to watch whether incoming data come in stronger or weaker than ECB projections. He said underlying inflation has not yet moved, described that as a typical delay, and said he would set a high bar for directional forward guidance now.

The euro suffered at the hands of a surging dollar yesterday, falling to a low of 1.1045 and closing at 1.1056. Although growth and spreading cost-of-living protests concern the market, U.S. monetary policy is the main driver as investors and traders try to discern the future path of interest rates from the paltry guidance coming from the Federal Reserve.

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