Manufacturing recovery on track despite inflation

However, the survey by the Confederation of British Industry (CBI) also found that firms have come under intense pressure to pass on rising costs in raw materials, with prices rising at their fastest pace since October 2008.

Ian McCafferty, chief economic adviser at the CBI, said: ’We are seeing some rebalancing of the economy as demand and activity moves away from the drivers of the last cycle — government spending and consumer spending — towards exports and investments. Growth will have to be generated by those two if we’re to see a solid and sustainable recovery.’

Of 394 manufacturers that responded to the CBI’s January Quarterly Industrial Trends Survey, 32 per cent had seen an increase in output over the past three months while 16 per cent said that it had fallen, giving a balance of plus 16 per cent, compared with +9 per cent in the last survey in October.

This was driven primarily by growth in export orders (+13 per cent), with domestic orders rising more modestly (+9 per cent). Asked about expectations for the next three months, firms predicted output to grow at a similar pace based on their order books.

In terms of specific sectors, mechanical engineering, metals, and electronics all enjoyed increased output; however, the motor industry showed a marked decline.

Bucking the trend in the wider economy, the manufacturing sector reported an increase in employment in the past three months.

Although the survey paints a broadly positive picture, there was some cause for concern. Manufacturers have raised output prices markedly during the past quarter in response to rising cost of raw materials. Looking to the next quarter, price increases are expected to accelerate sharply: a balance of +31 per cent of firms expect domestic prices to rise alongside +34 per cent for export prices — the highest since January 1995.

How long this can be expected to carry on and whether interest rates might rise to curb inflation was a question addressed by McCafferty.

He said: ’The Bank of England continues to face a difficult set of challenges, clearly it’s got to balance two factors: one that we are seeing an intensification of price pressure against the need to maintain confidence and prevent a sluggish recovery. Let’s not forget that while these data talk about manufacturing, the service sector is perhaps not recovering quite as well.’