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BUSINESS NEWS JAN 22, 2008
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UK manufacturers report orders growth has held up with exports remaining strong - CBI Industrial Trends Survey

UK manufacturers’ more pessimistic expectations three months ago did not materialise and the sector has proved resilient in the face of continuing concerns over a wider economic slowdown in the wake of the credit crunch, the latest CBI Industrial Trends Survey reveals today.

The quarterly version of the survey shows that firms’ orders growth has held up, with export orders in particular remaining healthy. But rising food and energy costs show no sign of abating and firms expect their domestic prices to go up at the fastest rate for 13 years. Export prices are also expected to rise faster than they have for over two years.

Demand has continued to grow, with 28% of firms saying total new orders increased in the three months to January and 17% reporting a decrease. This balance of +11% exceeded expectations and was broadly in line with the previous four surveys. Slower growth is expected in the next three months (a balance of +4%).

On the monthly measure, total order book levels were healthy - a balance of +2% said they were above normal in January, the same as in April 2007 and the highest figure in a quarterly survey since April 1995 (+8%).

Demand this quarter was for the most part driven by export orders, no doubt helped by the weaker pound - though much of the currency’s depreciation occurred after this survey was conducted.

A balance of +10% of firms reported a rise in overseas orders, compared with a broadly flat balance for domestic orders (-1%). Exports grew at the fastest rate since October 1995 (+11%). Concerns that political and economic conditions abroad will limit export orders over the coming three months have increased slightly since October and expectations are for flat growth in the next three months.

Growth in manufacturing output remained firm, with a balance of +8% broadly in line with the positive expectations in October. Similar rates of growth are now expected (a balance of +9%).

Nevertheless, sentiment fell for the second consecutive quarter, with a balance of 18 per cent of firms less optimistic about the business situation than they were three months ago.

In spite of the drop in sentiment, investment intentions over the next 12 months are broadly unchanged after October's dip, and spending plans for product and processes are their most positive since 1997.

Despite the ongoing credit squeeze, manufacturing firms do not report that access to or cost of external finance is a factor likely to limit either output or investment expenditure.

Skilled labour shortages are less likely to constrain output and investment expenditure than in the last six months. Manufacturing employment fell in the last three months (for a balance of -14%), in line with the long-term average (-15%). A balance of -19% expects to reduce staff numbers in the next three months.

Based on the survey, the CBI estimates 13,000 jobs were lost in the sector in the last quarter of 2007 and that 24,000 will be lost in Q1 of 2008, bringing the total employed in manufacturing to 2,873,000.

Average unit costs grew (for a balance of +25%), continuing the pattern of rapid growth in the last three years. Much of this has been due to the long rise in oil and metal prices, but more recently has been compounded by other raw materials such as foodstuffs.

As a result, firms’ prices have continued to go up, at a similar rate to the past year. Domestic prices rose for a balance of 13% and export prices for a balance of 5%, the strongest rate of increase since July 2005 (+5%). Domestic prices look set to continue going up, and at an expected rate (a balance of +21%) not seen since January 1995 (+33%).

Ian McCafferty, CBI Chief Economic Adviser, said: “Manufacturers share similar concerns to other sectors about the economy – a fear that rising costs might become combined with slowing demand.

“Thankfully, the expected wobble in demand didn’t materialise in the last three months and orders for British-made goods have held up, particularly from abroad. What we are seeing is part of a necessary rebalancing of the economy, in the face of slowing consumer spending.

“The dilemma the Bank now faces over interest rates is to weigh risks of a slowdown with the real and present pressure on prices in both factories and other areas of the economy. Price pressures from oil and food costs will bring higher inflation in the short-term and may push the inflation rate further above target during 2008, making the Bank's decision even more difficult.”

1. A balance is the difference between the percentage of manufacturers reporting an increase and those reporting a decrease.

2. The January 2008 CBI Industrial Trends Survey was conducted between 13th December 2007 and 9th January 2008. 482 manufacturing firms replied. During the survey period the pound averaged €1.32 and $1.99, while Brent Crude averaged $93.76 per barrel, compared with €1.44, $2.03 and $78.24 per barrel in the July survey period.

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