UK manufacturing shows signs of improvement

Paul Boughton

The UK’s manufacturing sector is strengthening with exports growing and the first rise in domestic orders in two-and-a-half years, the Confederation of British Industry (CBI), the UK's leading business organisation, said. But the UK’s leading business group warned that output price inflation is rising and profit margins are coming under renewed pressure because of increased costs.

The CBI’s latest quarterly Industrial Trends Survey revealed rising orders for UK manufacturers in the three months to April. Of the 439 firms surveyed, 34 per cent said the volume of total orders rose, while 23 per cent said they fell. The resulting rounded balance of +12 per cent is the first significant growth since January 2008.
The improvement in total orders was driven by strengthening overseas demand. A third of firms (33 per cent) reported a rise in export orders, and 12 per cent a fall, giving a rounded balance of +20 per cent. That is the strongest balance since July 1995 (+21 per cent) and was better than expected (+13 per cent).
A modest rise in home-grown demand also contributed to the rise in total orders. 30 per cent of firms said domestic orders increased, and 25 per cent said they decreased. The resulting balance of +5 per cent marks the first growth since October 2007 (+5 per cent), and was better than the flat performance that had been predicted.
However, orders and output are recovering from thirty-year lows, and the level of total order books remains below normal (-36 per cent).
Looking ahead, strong growth in orders is expected in the next quarter. 32 per cent of firms predict an increase in total orders, and 13 per cent a fall, giving a rounded balance of +20 per cent. A balance of +18 per cent expect exports to increase, and a balance of +12 per cent predict a rise in domestic orders.
Given improving demand at home and abroad, manufacturing production is expected to pick up in the next quarter (+14 per cent), following a subdued April quarter (+1 per cent) during which firms ran down their stocks further.
 Sentiment about the overall business situation is continuing to improve, with a net 24 per cent more optimistic than three months ago. This is the highest quarterly improvement in sentiment since January 1994 (+27 per cent).
Cost pressures are intensifying. A net 20 per cent of firms reported average unit costs rising, compared to +5 per cent in the four previous quarters, and higher than the +7 per cent expected. During the April quarter domestic prices were stable (-1 per cent), but firms anticipate increasing their prices more rapidly in the next three months (+16 per cent), as higher costs feed through. 

Ian McCafferty, the CBI’s Chief Economic Adviser, said: “Manufacturing appears to be on an upward trend. After eight consecutive quarters of falling domestic orders, home-grown demand is slowly starting to recover.
 “The appetite for UK-made goods overseas is growing strongly, thanks to the relative weakness of Sterling and the gradual recovery of the global economy. With demand expected to strengthen further and stocks running low, UK firms are planning to step up production in the next quarter.

“Given the improving picture, manufacturers are feeling more optimistic about the business situation. However, sharply rising raw material prices are pushing up costs, and firms plan to raise prices over the next three months to alleviate some of the squeeze to profit margins.”

Over the past three months firms continued to de-stock, with a balance of -9 per cent indicating that levels of finished goods fell in the quarter. However, de-stocking appears to be coming to an end, with stocks of finished goods and work in progress expected to stabilise in the coming quarter, and the decline in stocks of raw materials slowing.
Access to credit and finance appears to be improving, but is still a challenge for smaller firms. 5 per cent of all firms cite credit or finance as likely to limit output over the next three months, and 9 per cent say it will constrain export orders.
Employment continued to fall, but at a slower rate. A balance of -12 per cent indicated staff numbers fell in the quarter, and a similar decline is expected in the next quarter (-11 per cent).

Investment intentions for the year ahead are subdued, similar to those in January’s survey. A net 8 per cent of firms are planning to invest on training and retraining, and a net 12 per cent on innovation. Capital expenditure on buildings is expected to decline (-16 per cent) over the next 12 months, while no change is expected in spending on plant and machinery (+1 per cent). 62 per cent of firms say they are working below capacity.  

The April 2010 CBI Industrial Trends Survey was conducted between 22nd March 2010 and 7th April 2010. 439 manufacturing firms replied.

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