The UK manufacturing recovery gathered momentum over the last three months with total orders increasing at their fastest rate for nine years, according to the latest CBI Quarterly Industrial Trends survey.
But the survey suggests that the strength of the pound, especially against the dollar, is holding back overseas sales with the expected acceleration in export orders largely failing to materialise.
20% of manufacturers said total new orders were down over the last three months but 38% said they were up. The balance of plus 18% is the highest since April 1995 and more than the plus 13% that had been expected. But that growth is from a low base and companies said the level of order books was still below normal.
Manufacturers had expected strong export growth during the last three months but that did not happen. The balance of plus 3% for the period indicates minimal growth in export orders and was well below the plus 17% growth expected. Export deliveries were also disappointing.
Export prices were also under strong downward pressure, with more firms having to cut than being able to raise them. 65% of respondents expected prices to limit export orders in the months ahead, the highest figure since April 2001.
Over the next three months manufacturers expected export orders to be higher than over the last three but they have sharply scaled back expectations compared with last quarter.
More positively, exporters are less concerned about political or economic instability than at any time since the attacks of 11 September 2001. Only 19% said those factors would limit exports, the lowest figure since July 2001.
CBI Chief Economist, Ian McCafferty, said :”The indications in this survey that the manufacturing recovery is taking hold are good news but the initial signs that the strengthening pound has affected exports are a concern. Given the state of the economy, business recognises that interest rates will have to go up over the next year but the Bank needs to consider the impact of its decisions on the currency when deciding the timing of any rate rises.”
Optimism about the overall business situation rose for the second month in a row but by less than last quarter. It was though the first instance of consecutive quarterly rises since July 2002.
Fewer firms expected lack of orders to be a problem over the next three months than at any time for 15 years. Asked about what is likely to hold back their output over the next three months 68% said lack of orders or sales would be a limiting factor, the lowest figure since January 1989.
The survey makes clear that manufacturing jobs continue to be lost though the rate of job cutting slowed further. 16% of firms said they increased jobs while 22% said they were employing fewer people. The balance of minus 6% has been bettered only once in the last six years. It compares with minus 15% last quarter and with minus 4% in October 2000.
The long-term squeeze on profits re-established itself as average costs rose a little and domestic prices fell again. The survey shows more firms cutting than raising prices in every quarter since April 1996. But the rate of price deflation has slowed significantly and manufacturers hope for a slight price increase over the next three months.
Investment in plant and machinery is expected to be broadly unchanged over the year ahead, with 90% of firms saying they had enough capacity to meet demand.
The survey was carried out between 25 March and 14 April 2004 and 761 manufacturers responded. During the survey period sterling averaged 1.51 Euros (DM2.95) and $1.83 compared with 1.43 Euros (DM2.79) and $1.79 in the January 2004 survey.