An unsettling September

Manufacturing orders remained well below normal in September with increasing costs putting further pressure on manufacturers’ profits, the CBI’s monthly Industrial Trends Survey reveals today.

Demand for manufactured goods remains subdued. The survey shows 39 per cent of firms reporting total order books below normal, while 12 per cent say they are above normal, a balance of minus 27 per cent. September’s balance for total order books was only slightly up on August when it had been the lowest since October 2003.

Cost pressures have further intensified for manufacturers. Oil prices averaged almost $65 per barrel in the survey period – 58 per cent higher than a year ago – while freight costs were up 33 per cent compared with August. According to the survey, manufacturers are unable to pass these costs onto their customers, with a majority (a balance of 8 per cent) expecting to cut prices rather than raise them.

Export orders weakened significantly in September, falling to their lowest levels since January, a balance of minus 25 per cent. Export orders had previously been holding up and had offset deteriorating demand from within the UK. This month’s survey shows a sharp drop in the demand from abroad for capital goods, such as machinery and equipment. A weak European export market also continues to depress orders.

”A combination of weak consumer spending and challenging world markets is weighing on UK manufacturing, following the sector’s contraction over the first half of the year. Cost pressures from high oil and transportation prices will only serve to depress profits further,” said Ian McCafferty, CBI Chief Economic Adviser.

“Although it is too early to say if this month’s decline in export demand is the start of a trend, the fall is a further blow for manufacturers at a difficult time. Firms will be hoping this is not the first sign of slow-down in the global economy in the face of the latest oil price increases.”

Looking ahead to the next three months, 31 per cent of companies expect to increase their output, against 25 per cent who predict a reduction. This positive balance of 6 per cent points to modest growth in production but may be due to companies aiming to rebuild their stocks. The current balance of 11 per cent of manufacturers reporting “more than adequate” stocks of finished goods is lower than the long-term average of 14 per cent.

The fall in average domestic prices predicted by manufacturers over the next quarter keeps expectations in negative territory for a fifth successive month, following a year of positive expectations. Only two of the ten industry groups surveyed this month – chemicals and metal products – expect prices to rise in their sector over the coming three months.