Robust demand for UK manufacturing

Demand for UK manufactured goods has continued to grow apace, according to the latest quarterly survey of Industrial Trends by the CBI.

According to the survey, growth in manufacturers’ total new orders is stronger than at any time in the last decade, other than during a short period in 2004. Levels of export orders have so far withstood the strengthening pound to remain steady over the last three months.

Growth in output is reported to have slowed slightly in this survey, but the highest balance of firms for over two years now expects output growth to increase over the next three months.

Manufacturers are managing to rebuild profit margins, after unit costs rose at the slowest pace for two years while prices increased at a similar rate to last quarter. Cost pressures are expected to ease further during the coming months.

Business sentiment has improved, with the highest balance since January 2004 feeling more optimistic about the general business situation than three months ago.

A balance of +12 per cent saw the volume of their total new orders increase over the past three months, the best figure recorded since April 2004. This was only slightly lower than January’s expected figure and a similar rate of growth is now forecast for the next quarter.

The recent strength of the pound has so far failed to reduce export orders, with volumes remaining flat. The largest balance of firms for two years (+7%) is now more optimistic about export orders over the coming year, despite a recent drop in levels of export orders.

Output growth slowed a little over the last three months but the highest quarterly balance (+18%) since January 2004 (+21%) now forecasts an increase in volume of output over the next quarter. Stocks of finished goods are considered adequate to meet demand, while stock levels of raw materials and work in progress give further evidence that firms are preparing to increase activity. Firms recorded twelve-year highs for levels of both raw materials (a balance of +9%) and work in progress (+8%), against +11% in October 1995 and +10% in January 1995).

As a constraint to firms’ output, the level of orders or sales is cited by the lowest proportion of manufacturers since January 1989 (66%).

Manufacturers reported average domestic prices had risen at a similar rate to last quarter. This time a balance of +14 per cent said they had been able to increase prices, only slightly below January’s twelve-year record balance of +15 per cent. This was lower than the expected +19 per cent. A balance of +16% hopes to raise prices over the next three months.

The pace of cost increases slowed, with a balance of +11 per cent reporting a rise in unit costs the lowest since April 2004, meaning more firms are managing to repair profit margins. Cost pressures are expected to ease further in the coming months, with the lowest balance since January 2004 (+4%) expecting unit cost increases in the coming quarter.

The proportion working below capacity edged down to 55 per cent, slightly below the long-term average of 58%, but firms report that capacity is largely adequate to meet demand. With capacity having been reduced, intentions for investment in plant and machinery continue on a gradual upward trend.

Manufacturers reported a smaller reduction in numbers employed than had been expected (a balance of -19% compared to the expected -29%). A balance of sixteen per cent expects to cut jobs in the coming months. Based on the survey, the CBI estimates 25,000 jobs were lost from the sector in 2007 Q1, and that 30,000 will be lost over Q2, reducing the total employed in manufacturing to 2,919,000.

Sentiment about the business situation and prospects for exports have both improved. The highest balances for two years were recorded for both measures in this survey, suggesting a sharp improvement between January and April, as the climate of demand remains supportive and margins are being rebuilt.

The CBI’s Chief Economic Adviser, Ian McCafferty said: ‘Last year's profits squeeze, in which manufacturers had to absorb sharply rising costs, with no hope of passing them onto the marketplace, is now being reversed. Cost pressures are finally easing and firms are managing to increase prices and restore battered profit margins.

‘The strength of the pound has not yet hit export orders. Firms remain positive about the prospects for overseas demand and still hope to raise prices for exports as well as domestic goods.

‘It is clear that demand conditions remain strong in the manufacturing sector. With output growth expected to pick up after slowing in recent months, the recovery since early 2006 is set to continue.’