Recovery hit

Manufacturers say orders and output growth were sluggish over the past three months, according to the CBI’s closely-followed quarterly industrial trends survey, published today.

Higher costs and difficulty in raising prices are increasing pressure on margins. With expectations for weak growth in demand, manufacturers plan to scale back investment and reduce headcount.

31% of manufacturers reported higher orders in the last quarter and 27% reported a fall. The balance of 4% compares to 2% the previous quarter, 18% in April and 13% in January.

Output increased for the fourth successive quarter, but growth was at the slowest rate this year. 28% of manufacturers reported higher output and 22% said it had fallen, a balance of 6%. This compares to a balance of 7% last quarter, 15% in April and 14% in January.

Looking ahead, production is expected to hold up in the next three months, with an expected balance of 14%. But new orders are expected to grow at a much slower pace of 3% during the period, casting doubt on prospects for continued robust growth.

Manufacturers have cut their investment forecasts and will reduce capital expenditure on plant and machinery, with 18% of firms planning on spending more and 35% planning to spend less, a balance of -17%. This compares to neutral intentions last quarter and a balance of 6% at the start of 2004.

Firms cut jobs at a comparatively modest rate over the last quarter, with 23% of firms increasing employment and 27% reducing it, a balance of -4%. More significant cuts are expected in the next quarter, with a balance of 15% of manufacturers expecting to reduce job numbers.

Average unit costs again rose markedly by recent standards, with 32% of manufacturers reporting higher costs per unit of output and 18% reporting lower costs, a balance of 14%. Firms expect costs to increase at the same pace next quarter.

Raw material cost increases have been significant: in the last three months, oil prices rose by 32% and metals prices by 16%. Oil prices are up 75% and metal prices up 55% since October 2003.

Firms have not been able to recoup these higher costs by raising prices. In the past three months, 14% of firms increased prices and 19% cut them, a balance of -5%. This compares to a balance of 2% reporting an increase last quarter.

These factors have impacted on overall business optimism. After three successive quarters of increases, the last quarter saw a fall in confidence. 17% of firms said they were more optimistic about the general business situation and 27% said they were less optimistic, a balance of -10%.

Ian McCafferty, CBI Chief Economic Adviser, said: “Although orders and output have risen, the rate of increase is slow. Manufacturers are cutting back on investment and jobs as they become less confident in the pace of recovery. Oil and commodity prices are damaging profitability and we expect this pressure on margins to be maintained.”

“Thus there are clear threats to the manufacturing sector. Taking into account everything else we know about the economy as well, we urge the Bank of England to keep interest rates on hold for the foreseeable future.”

The Quarterly Industrial Trends survey was carried out between 23 September and 13 October and 770 manufacturers responded. During the survey period, sterling averaged €1.46 (DM2.85) and $1.80 compared with €1.50 (DM2.93) and $1.84 in the July 2004 survey.

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