Output on the increase

Manufacturers expect their factory output to increase in the Spring as order books continue to fill, according to the CBI's manufacturing snapshot for March.

In the monthly Industrial Trends Survey, 18 per cent of manufacturers reported their order books were 'above normal' compared to 34 per cent who said they were 'below normal.' The balance of minus 16 per cent is the most upbeat since March 2005 (-13%) and an improvement of 12 points since January. This has been driven by strengthening domestic demand supporting the improvement in export orders in the last quarter of 2005.

As a consequnce manufacturers' expectations for growth are improving. A balance of plus 13 per cent expect output to rise over the next three months, the highest since February 2005 (+19%). It is also well above the survey average of plus eight per cent since the manufacturing sector pulled out of recession in the early 1990s.

But, the CBI warned, although this is the second successive month where order books have picked up, it is against a background in which industry struggled for most of last year.

There has also been a significant split in the fortunes of capital goods - industrial machinery, engines, agricultural equipment and the like - compared to consumer items.

In January, orders for capital goods were well 'below normal' (a balance of -18%) but by March this had improved by 22 points to plus four per cent, indicating demand was 'above normal'. But the balance of orders for consumer items - food, footwear, clothing, pharmaceutical products and electrical goods, for example - only improved from minus 30 to minus 23 per cent.

Manufacturers' expectations for output over the next three months suggest this two-track rate of growth will continue. A balance of plus 30 per cent of manufacturers expect output of capital goods to grow next quarter compared to plus two per cent for consumer items.

A balance of seven per cent plan to increase their selling prices over the next quarter but spiralling energy bills and the high cost of raw materials will keep profit margins under pressure.

"There are emerging signs that the hard-pressed manufacturing sector is improving,” said Ian McCafferty, CBI Chief Economic Adviser. “Domestic orders are picking up and production expectations are more positive with manufacturers reporting a more buoyant market than in previous months.

"However high energy and raw material costs will continue to squeeze profit margins and the weakness on the high street continues to be a problem. So, while there are grounds for optimism, life is still tough for manufacturers."