No Baghdad bounce

UK manufacturers are still struggling against weak demand and falling prices despite the depreciation of sterling and the end of the Iraq conflict.

The latest CBI Monthly Industrial Trends survey published last Thursday shows that any gains from the reduction in global uncertainty and the cheaper pound have yet to show through. Manufacturers’ order books were as weak as last month and continue to be significantly below normal.

40% of respondents said orders were below normal while only 11% said they were above. The balance of minus 29% is the same as the April survey and similar to results seen since September when last summer’s temporary improvement halted.

Export orders were no better than last month. They were still well below normal but slightly less so than at the start of the year.

Though they do not appear to have seen much benefit so far, there is some indication that manufacturers believe sterling’s depreciation will ease trading conditions.

Firms expect output to go on declining over the next four months but by less than expected in March and April when expectations were the weakest for more than a year. In this survey they said they expect the fall in output to be only marginal. A balance of -3% in the survey compares with -10% last month.

Ian McCafferty, CBI Chief Economist, said: ‘So far there is little sign of any ‘Baghdad bounce’. The decline in sterling in recent months should help ease the pressures on exporters, but they are having to battle against weak demand in their key markets and increasing orders will depend on a good recovery in overseas markets. That remains some way off.

‘Initially the weaker pound will help alleviate the horrendous pressure on profitability which is holding back investment.’

In the previous survey manufacturers expected prices to fall at their slowest rate since December 2000. But that optimism has proved to be only temporary. In this survey, respondents expect the rate of decline of prices to accelerate to levels typical of the last twelve months, stepping up pressure on profit margins.

Weak demand means manufacturers had little success in reducing stocks. Only 5% said stocks were less than adequate to meet demand while 24% said they were more than adequate. The balance of + 19 was broadly the same as it has been since January and a little above the long-run average of +14%.

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