A sharp drop in investment is threatening to fuel inflation and leave UK manufacturers unable to meet an expected recovery in demand next year, the CBI warned this week.
The CBI’s most recent forecast predicted that investment in manufacturing would fall by 14.9% this year, and continue to drop until late 2000. Output is expected to be flat over the same period.
`What worries me is that there is not much capacity there, so that when the upturn comes the result will be inflation,’ said Kate Barker, the CBI’s chief economic adviser.
An increase in imports is expected to add to the inflationary pressure. The CBI forecasts that imports will rise by 4% this year, as exports decline by 0.4%.
Barker said another concern was that the shortfall in capacity was not being addressed. `Investment at the moment tends to be rationalisation and cost-cutting measures.’
She said the reasons for the downturn in investment were cost pressures, the strength of sterling and a lack of confidence.
These factors are likely to increase the pressure on manufacturers to reduce costs. Nor is much short-term relief expected, as the CBI predicts that sterling will weaken against the euro only gradually.
The CBI reported that business confidence was rising, however, with manufacturers more positive about the future than at any time since 1997.
`Manufacturers can take some heart from these findings,’ said Sudhir Junankar, the CBI’s associate director of economic analysis. But, he added, `export order books are still far below normal’.
A further sign of improvement in activity came this week from the Chartered Institute of Purchasing and Supply, whose Purchasing Managers’ Index showed that the manufacturing sector had grown for the third successive month in August.
Orders also rose, but at a lower rate than in July, according to the CIPS. The picture on jobs was more mixed, with a net loss overall but with some firms unable to find suitable new staff.