Homegrown demand is recovering

Apr 27 2010 by Sarah Green, The Journal

THE UK's manufacturing sector is strengthening with exports growing and the first rise in domestic orders in two-and-a-half years according to CBI's latest survey. However, 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% said the volume of total orders rose, while 23% said they fell. The resulting rounded balance of +12% is the first significant growth since January 2008. .

The improvement in total orders was driven by strengthening overseas demand. A third of firms reported a rise in export orders, and 12% a fall, giving a rounded balance of +20%. That is the strongest balance since July 1995 and was better than expected.

After eight consecutive quarters of falling domestic orders, home-grown demand is slowly starting to recover. 30% of firms said domestic orders increased, and 25% said they decreased. Looking ahead, strong growth in orders is expected in the next quarter.

Sentiment about the overall business situation is continuing to improve, with a net 24% more optimistic than three months ago. This is the highest quarterly improvement in sentiment since January 1994.

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% 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.

Investment intentions for the year ahead are subdued, similar to those in January’s survey. A net 8% of firms are planning to invest on training and retraining, and a net 12% on innovation. Capital expenditure on buildings is expected to decline over the next 12 months, while no change is expected in spending on plant and machinery. 62% of firms say they are working below capacity. So while the outlook for manufacturing is looking more positive, there is still little appetite for investment .

Sarah Green is regional director of CBI North East