Manufacturers struggle

Rising costs and weak demand have forced UK manufacturers to cut jobs in a bid to relieve tight profit margins, according to the latest quarterly survey of industrial trends by the CBI.

Manufacturing jobs fell by an estimated 25,000 in the last three months as employers sought to counter rising costs and stagnant prices by seeking greater efficiency and productivity. The total number of jobs lost in the sector in the past twelve months is 106,000.

The survey also reveals the rate at which costs are rising is accelerating - the balance of 23 per cent of manufacturers reporting an increase follows 20 per cent the previous quarter and 13 per cent before that.

Weak demand, meanwhile, kept prices flat and squeezed already tight profit margins further still as companies were unable to pass on the extra costs to their customers.

The weakness in demand is primarily in the home market - a balance of minus 15 per cent of firms recorded a quarter-on-quarter reduction in domestic orders - while the improving international economy meant export orders fared less badly (a balance of -5%).

Manufacturing output in the three months to January was also down - a balance of minus six per cent of firms indicated it was lower than in the previous three months, the fourth successive quarterly decrease.

Sixty-two per cent of companies are now working below capacity, four points above the long-term average of 58% and the highest number since April 2004 (65%).

The percentage of firms citing a lack of demand as the factor most likely to limit output was 84 per cent, the highest figure since July 2003, and a jump from 71 per cent in October.

Manufacturers plan to raise productivity levels by investing more in product and process innovation and skills training in the next 12 months than in the last.

Further reflecting the downturn in manufacturing capacity requirements, investment plans in buildings, plant and machinery remain very weak, the report says.

Only 27 per cent of manufacturers cite expanding capacity as a reason for capital expenditure - a figure which has fallen consistently since January 2005 when it peaked at 39 per cent.

Ian McCafferty, CBI Chief Economic Adviser, said: "Conditions for manufacturers are getting increasingly tough as costs continue their seemingly inexorable rise but weak demand keeps prices down, squeezing already thin profit margins even further.

"The sustained high level of oil and sharply increased gas prices have driven up energy and raw material costs and manufacturers are continuing to respond by cutting employment to curb the wage bill and boosting investment in efficiency-improving measures.

"Economic growth remains below par, partly because of the slowdown in consumer spending, and this has continued to hit manufacturers' domestic order books although exports are slightly more healthy. Investment intentions are also very weak and what is clear from the survey is that manufacturers have very little cause for optimism."

Month-on-month, the January balance for the level of total orders compared with 'normal' was minus 28 per cent, the largest negative figure since August 2005. The last noticeable positive balance, indicating 'above normal' orders, was in June 1995.

Manufacturing directly accounts for 3.3 million jobs in the UK - around 16 per cent of total employment - and a further 3 million jobs are dependent on the sector. Manufacturing accounts for nearly 60 per cent of all UK exports of goods and services.

The CBI survey follows last week's report by the Office of National Statistics which revealed manufacturers are facing the biggest squeeze between input and output prices for almost 30 years because of rising oil and gas prices which they have been unable to pass on to customers.