Melioration for UK manufacturing

Momentum in the

manufacturing sector faded over the past three months as overseas demand levelled out and the decline in domestic orders accelerated, according to the latest industrial trends survey from the

published today.

Consequently total orders fell slightly, confounding expectations of continued growth, and order book levels are seen as marginally below normal. Output growth, which in July had been expected to maintain the strong performance of the first half of the year, slowed considerably.

While manufacturers expect a modest improvement in orders and output in the coming three months they are scaling back their expectations compared to earlier in the year. As a result they are slightly more pessimistic about the general business situation than three months ago.

Of the 551 firms which responded to the survey, 26 per cent reported the volume of total new orders was down in the three months to October compared to the previous quarter and 21 per cent registered a rise, a balance of minus five. The domestic order balance was minus 11, and exports were minus one.

Breaking the sector down, overall demand for capital goods - heavy plant, industrial machinery, office equipment and computers - was steady last quarter. But orders for intermediate products, such as chemicals, textiles and plastics, and consumer goods, like clothing and furniture, fell.

According to the survey, the monthly breakdown reveals that the slowdown in demand has been concentrated in the past few weeks. The balance of manufacturers reporting orders book levels above or below normal fell from minus five in September to minus 20 this month, the weakest since the start of the year. Output expectations have also softened as manufacturers adjust their outlook in response to the slowing momentum.

As a result of lower demand, fewer firms are working at full capacity than in July (59% are working below capacity, compared to 50% three months ago) and 92 per cent have sufficient capacity to meet expected demand.

Average units costs rose in the quarter - the balance of manufacturers reporting an increase was +24, the highest since April 2005, +32 - and this squeezed profit margins as selling prices rose only modestly at home and fell overseas.

Firms are still hoping that they will be able to pass on some of their higher costs to UK customers next quarter - a balance of plus 12 expects average domestic prices to rise - but overseas prices are set to remain flat and are still seen as the biggest inhibitor to export orders. The balance of manufacturers reporting a fall in average export prices over the past quarter is the weakest since July 2004.

This means profit margins will remain under intense pressure as a balance of plus 18 of manufacturers forecast average unit costs will rise, with increases expected to be higher for intermediate and consumer products as the pass-through of higher costs moves beyond capital goods.

As firms seek to cuts costs, employment in the manufacturing sector, which has been steadily declining for 12 years, fell again last quarter. It is expected to fall again next quarter too - the balance of manufacturers expecting employment to go up or down is minus 21, the weakest since October 2003 which recorded a figure of minus 26.

Firms are keen to improve their product and process innovation and a balance of plus eight intend to invest more in this area over the coming year than in the past twelve months. Correspondingly, a balance of plus 10 expect to spend more on training and retraining than in the past year. Investment intentions in buildings, plant and machinery are the weakest since the start of the year.

‘The unexpectedly strong recovery in manufacturing over the first half of the year has not been sustained and it looks as if we are entering a period of slightly more modest growth,’ commented CBI Chief Economic Advisor Ian McCafferty. ‘The slowdown in the US has clearly dampened export orders and domestic demand remains fragile.’

Mr McCafferty added: ‘Although oil prices have dropped from their high of the summer, the knock-on benefit of cheaper input costs for manufacturers has yet to feed through, and firms still find it difficult to raise selling prices in response to increased costs. But pressures to increase prices remain in the system, particularly in the consumer goods section.’