Pace of manufacturing recovery eases

The CBI’s Quarterly Industrial Trends survey has found that manufacturing recovery has slowed with growth in orders almost halting and output growth slipping back.

The manufacturing recovery has slowed with growth in orders almost halting and output growth slipping back. Those are the key findings of the CBI’s Quarterly Industrial Trends survey published this week.

The survey does not indicate the manufacturing recovery is over but after six months of reasonable expansion, the pace of demand and output growth has eased. This reflects some moderation in the fast-growing economies of the US and China and the recent interest rate increases here.

The CBI survey also makes clear that rising oil and commodity prices have pushed up costs at the fastest rate for more than eight years, maintaining the squeeze on profit margins.

Twenty-seven per cent of manufacturers said total new orders were up over the last quarter but 25 per cent said they were down. The balance of plus two per cent is sharply down on the plus 18 per cent of the previous quarterly survey in April. A balance of plus five per cent suggests growth in orders is only expected to pick up slightly over the next three months.

Output grew again over the last quarter. This is the first time since 1997 that manufacturers have reported rising output in three surveys in a row, though growth was much slower than in the previous two quarters. Over the next three months growth is expected to continue but only at a similar, modest rate.

Rising oil and commodity prices have significantly increased manufacturers’ costs. Twenty-six per cent said their unit costs had risen over the last three months while 10 per cent said they had fallen. The balance of plus 16 per cent compares with plus six per cent in the previous quarter and indicates the fastest rise in costs since January 1996. Manufacturers expect costs to rise almost as quickly over the next quarter.

Rising costs are severely squeezing margins, for domestic prices for manufactured goods edged up only marginally – the first time prices have risen since April 1996. Prices are now expected to go up slightly further over the next three months, suggesting that the seven-year period of price deflation in the sector has come to an end.

For the first time in seven years manufacturers did not cut jobs. Employment rose slightly and this was the first increase since October 1995. But firms expect a return to moderate job cutting over the next three months.

Despite the slowdown in the pace of recovery, firms remain reasonably confident about the general business situation with more saying their optimism rose over the last three months than saying it fell. This represents the third successive improvement in optimism.

The outlook is not yet certain enough to encourage firms to make major investment commitments. Investment in plant and machinery is expected to be broadly unchanged over the next 12 months while investment in buildings is likely to fall. Although capacity utilisation has picked up, 89 per cent of firms regard their capacity as at least adequate to meet expected demand in the year ahead. Uncertainty about future demand was cited by 47 per cent of firms as a constraint on their investment plans.

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