Setback for UK manufacturing

Manufacturing orders have fallen sharply since January with firms reporting the weakest quarterly performance since July 2003. Orders for consumer goods declined significantly, while capital goods orders were unchanged, according to the CBI’s quarterly Industrial Trends Survey.


The reports says that over the three months to April costs and prices increased at the fastest rate since July 1995, with costs outstripping prices. Falling orders and output and rising costs and prices have led to the third successive deterioration in confidence.


Cost pressures intensified across all major sectors as manufacturers faced the knock-on effect of sharp rises in oil prices, which averaged 30.5 per cent more in the April survey period than in January. This also represented a 67 per cent increase since this time last year. The cost of other raw materials such as metals is also much higher than a year ago.


Forty-one per cent of firms saw costs rise over the past three months, while nine per cent saw them fall. This surveys’ balance of plus 32 per cent compares with plus 23 per cent in the previous survey.


On total new orders, 36 per cent of firms saw them fall over the past quarter and 19 per cent saw them rise. The balance of minus 18 per cent (after rounding) is the weakest for 20 months and compares with minus four per cent in the previous survey.


Export orders declined at the fastest rate in 18 months and firms reported the first decline in output for six quarters. January’s expectations of modest growth appear to have been overtaken by an appreciation in the sterling/dollar exchange rate and disappointing growth in Europe. Twenty-nine per cent reported a fall in export orders over the past three months, while 15 per cent reported a rise. The balance of minus 15 per cent compares with minus 8 per cent in the January survey.


The fall in orders has resulted in the first decline in output for six quarters despite expectations of a modest increase. The balance of minus 10 per cent of firms reporting a drop in output compares with plus two per cent in the January survey. Manufacturing employment continued to decline.


Although average domestic prices increased at the fastest rate since July 1995, the increase was slower than the rise in costs, and weaker than expected. The largest increase was for intermediate goods, but for the first time in three years, prices for capital and consumer goods were slightly higher than three months ago. Prices for consumer goods are expected to fall over the coming quarter.


Manufacturers plan to cut investment in plant and machinery and buildings, reflecting deteriorating confidence and uncertainty about future demand. Spending on training and retraining, and on innovation, is expected to increase modestly.


Ian McCafferty, CBI Chief Economic Adviser, said: “This latest set-back for manufacturing can be attributed to a number of factors. Probably the most significant is the hike in oil prices, which has helped to push up costs at the fastest rate for nearly ten years, while also constraining demand for manufactured goods in key overseas markets such as the EU.


“Exporters could also blame a modest appreciation in sterling for the decline in orders at the fastest rate in 18 months. However, the decline in domestic orders for consumer goods highlights the more difficult conditions in the home market, too.”


Sir Digby Jones, CBI Director-General, said: “This is further evidence that any post-election tax raid on business would hit a manufacturing sector already in a fragile position. We will resist any such move fiercely. The Bank of England must continue to ensure that inflationary pressures remain under control, but they must also avoid a premature rise in interest rates.”