CBI: Recovery well on track

London – The manufacturing recovery is well on track, driven primarily by export orders, the CBI said 20 Jan. Output and orders growth picked up over the past three months, and companies expect another solid rise in production during the next quarter.

But prices for finished goods rose markedly, and an even faster increase is predicted over the next quarter, as manufacturers look to pass on higher raw material costs, the UK business lobby group warned.

Ian McCafferty, CBI Chief Economic Adviser, said: “It is encouraging to see that employment prospects in the sector have risen for the second consecutive quarter and manufacturers’ confidence is improving.

“But manufacturers have come under intense pressure to pass on rising costs: they have increased prices markedly in this quarter, and expect to raise them at an even faster pace over the next three months. This will drive further inflationary pressure in the wider economy.”

In line with the improving demand outlook, manufacturers’ investment intentions have strengthened. Investment in plant & machinery is expected to increase over the next twelve months for a balance of +10%, and companies also plan to spend more on training and retraining (+19%), and on product and process innovation (+22%) over the coming year.

Compared to the previous year, firms no longer plan to reduce their capital expenditure on buildings over the next year, with the survey balance (+1%) the highest since July 1997 (+2%).

The improving outlook for investment is driven by a pick-up in capacity utilisation and less stringent finance conditions.

The number of firms working below capacity has fallen (59%) compared with October (64%), and is now back in line with its long-run average. In addition, significantly more firms plan to expand capacity through investing more over the coming year (41%).

Financial constraints to investment are easing. The number of manufacturers citing inadequate net returns as a factor likely to limit capital expenditure over the next year fell from 37% in the previous two quarters to 28%, the lowest since the series began in October 1979.

Fewer firms highlighted internal finance shortages as a factor expected to restrict expenditure. In addition, credit and finance was highlighted by half as many manufacturers as a likely hindrance, compared with the October survey.

Monthly data from the survey showed that 21% of manufacturers said that total order books were above normal, while 37% said that they were below. The resulting balance of -16% is down on December (-3%), but is still slightly above its long-run average. Overseas demand remains stronger however, with export order books reported to be in line with par (0%), albeit down slightly from December (+4%).