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Prospects for manufacturing activity worsening says CBI

27 October 2011

Sentiment has deteriorated sharply among UK manufacturers, in anticipation of significant falls in activity over the next three months, the CBI reported on Wednesday (October 26). Manufacturing orders and output are expected to fall over the next quarter, following modest rises in domestic demand and production over the past three months. Firms are also predicting a run-down of their stock holdings.

CBI chief economic adviser, Ian McCafferty

Sentiment about both the general business situation and export prospects fell for the second consecutive quarter, with net balances of -30% and -24% of firms reporting that they were less optimistic than three months ago. The falls in sentiment were the sharpest since April 2009.
 
Of the 446 manufacturers responding to the latest Quarterly Industrial Trends Survey, 30% said that domestic orders rose in the three months to October and 25% said that they fell. The resulting balance of +5% indicates a very modest rise over the past quarter, although this was slightly better than expectations of no growth.

 
Over the same period, export orders were flat (a balance of +1%), in line with expectations. This was the lowest survey balance for this question since October 2009 (-7%).

 
In the next three months, firms expect both domestic and export orders to fall significantly (-13 and -14 respectively). The expected balances are the weakest since July 2009.

 
One factor behind the disappointing export performance is the availability of export credit finance. The proportion of respondents citing this rose sharply in the latest survey (18%), to its highest since October 1968.

 
Firms also expect to reduce their stock holdings in the coming quarter, with finished goods stocks in particular set to be run down sharply (-14%). Monthly data from the survey showed that stocks remained high relative to adequate levels (+21% for the second consecutive month) – the survey balance is still the highest since June 2009 and above the long-run average (+14%).

 
In line with expectations of falling orders and stocks, manufacturers also expect output to fall over the next three months (-11%) – if realised, this would mark the first decline since October 2009. This follows another modest rise in production over the past quarter, with a balance of +10% of manufacturers reporting an increase. However, this was slower than the strong expansion seen in the first half of this year.

 
Alongside the expected fall in activity over the next three months, manufacturers anticipate a slight reduction in headcount (-5%). This follows another robust rise in numbers employed this quarter (a balance of +18%), the fifth consecutive increase.

 
Manufacturers still plan to spend less on buildings and plant & machinery in the year ahead relative to the past twelve months (balances of -14% and -9% respectively), although investment intentions have not deteriorated on the previous survey. Ian McCafferty (pictured), CBI Chief Economic Adviser, said:


“Manufacturers saw modest growth in orders and production over the past quarter. However, sentiment has deteriorated sharply, and firms expect sizeable falls in activity over the next three months. The quarterly fall in sentiment is the largest since the height of the recession in mid-2009. Confidence among manufacturers is no doubt also being sapped by uncertainty over developments in the Eurozone, leading to broader concerns over global growth.”
 
Output price inflation moderated considerably in the three months to October. Domestic prices were flat (+3%), while export prices fell modestly (-7%) for the first time since January 2010. But while unit cost inflation also eased (+24% - its lowest since April 2010), the rate of increase continued to outpace that of prices, leading to a squeeze on profitability.


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