A further fall in orders

UK Manufacturers have reported a fall in new orders for the third successive quarter, although the decline was less severe than in the previous quarter, according to the

latest Industrial Trends Survey.

Domestic demand weakened further but this was partly offset by an unexpected pick-up in export orders. Business sentiment continued to fall, for the fourth consecutive quarterly survey.

The rate of increase in unit costs slowed sharply in the three months to July, but downward pressures on domestic prices intensified, leaving profit margins under pressure.

Thirty-one per cent of firms saw the volume of total new orders decrease over the past three months, while 24 per cent saw an increase. The balance of minus seven per cent suggests a more modest rate of decline than the minus 18 per cent seen last quarter, but is still disappointing given the expectation for a slight increase in April's survey.

Average domestic prices also fell in the three months to July, which meant that despite slower growth in costs, the squeeze on profit margins has continued. In contrast, firms increased export prices for the second successive survey.

Looking ahead, firms have scaled back their expectations for orders in the next three months, and these expectations are now at their lowest since July 2003. Further price cuts are anticipated over the next quarter.

As a result of these trends, manufacturing firms report that they are more pessimistic about the general business situation than three months ago. Thirty-three per cent of firms said they were less confident and 17 per cent said they were more confident, a balance of minus 16 per cent. This was the fourth successive quarter to see a deterioration in confidence.

With this declining confidence, investment intentions remain relatively weak. Investment in both plant and machinery and in buildings is expected to decline over the coming year. However, firms do expect spending on training to increase modestly.

The decline in overall demand was seen despite an unexpected boost from abroad. Twenty-nine per cent of firms report that the volume of export orders rose over the past three months, with 20 per cent reporting a fall, giving a positive balance of plus nine per cent. This marks the first rise in new export orders for 15 months, and the fastest rate since October 1995.

Ian McCafferty, CBI Chief Economic Adviser, said: "Whilst demand from abroad has helped manufacturing activity to hold up over the past three months, developments here in the UK have kept the sector under significant pressure.

"The decline in domestic orders and associated deterioration in pricing power and profitability is clearly affecting business confidence. These results reinforce the case for a cut in interest rates on 4 August."

Output remained broadly stable over the survey period, with producers of capital goods increasing output in response to stronger overseas demand. Firms expect output to pick up moderately over the next three months, with expectations returning to the levels seen in April of this year - having dipped in the two intervening monthly surveys.

Growth in overall unit costs slowed over the three months to July. That is despite manufacturers having to contend with sharp increases in oil prices, with Brent Crude averaging $58 a barrel over the past three months, an increase of eight per cent on the April survey period and 61 per cent on July last year.

Twenty-eight per cent of firms saw costs rise over the past three months, while 15 per cent saw them fall. The balance of plus 13 per cent compares with a balance of plus 32 in the previous quarter's survey, and was the fifth double-digit increase in succession.

Numbers employed remained on its long-term downward trend, with 30 per cent of firms saying employment fell and 19 per cent saying it went up, a balance of minus 12 per cent.