Manufacturing report highlights lost confidence in economy

28 July 2011

Companies are expecting slower growth over the next three months and are re-appraising their business plans to reduce employee numbers and invest less, according to the July Quarterly Industrial Trends Survey by business organisation the CBI.

More manufacturers said their optimism had fallen over the last three months than those whose confidence had grown, with a difference of -16 per cent compared with +9 per cent in the last survey — the first drop in sentiment since July 2009.

The CBI’s chief economic adviser, Ian McCafferty, said: ‘Orders and output growth in the manufacturing sector slowed slightly over the past quarter.

‘This is in line with a broader slowing in production globally, with supply chains around the world impacted by the Japanese tsunami earlier this year. Sentiment has also been affected by concerns over the Euro crisis and the squabbling over the US debt ceiling.

‘However, this slowdown is expected to persist into the third quarter. Consequently, manufacturers are now re-appraising their business plans, with firms expecting to lower recruitment in the coming quarter and invest less in the year ahead.

‘How far the slowdown will be borne out is yet unclear, but the combination of political and economic uncertainty is sapping confidence,’ McCafferty added.

Over the last three months, more manufacturers (32 per cent) have seen an increase in the total volume of new orders than those who’ve seen orders fall (24 per cent).

But the resulting balance of +8 per cent represents a slight easing in the speed of growth compared with the previous five quarters.

Factory output continued to grow above the long-run average in the three months to July, with a balance of +11 per cent of manufacturers reporting an increase. But again this was slower than the expansion over the past year.

Manufacturers are also expecting a further slowdown in growth, with orders expected to be unchanged (balance of 0 per cent) and production expected to rise more modestly (+6 per cent).

As a result, manufacturers are reappraising their business plans. After four quarters of rising employment, the balance of companies planning to reduce head count over the next three months has reached -10 per cent.

Manufacturers are also planning to spend less on plant and machinery compared with the past 12 months (a balance of -17 per cent), with plans for capital spending now below their long-run average for the first time since July 2009.

Fewer firms plan to invest in the year ahead to expand capacity, with more firms instead planning to replace existing capital and increase efficiency.