Manufacturers are more pessimistic after credit squeeze

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UK manufacturers have become more pessimistic about the business environment in the wake of the credit crunch, the latest quarterly CBI Industrial Trends survey has revealed.

However, the results show that despite the drop in sentiment, orders grew strongly and there is little evidence so far of negative impacts of the recent global financial instability.

A balance of 13 per cent of firms are less optimistic about the business situation than they were three months ago. This is the sharpest decline in sentiment since January 2006 (-14%), although previous episodes of financial turbulence have had a greater impact on confidence.

Demand levels have remained healthy, with 27% of firms reporting an increase in total orders in the three months to October 10, and 18% noting a decrease, giving a balance of 9%. This is a slight improvement on July (a balance of +7%), but a mild slowdown is expected over the next three months (+2%).

Export order volumes have held up well, with a balance of 6% of firms reporting growth, although export demand is expected to stabilise over the next quarter. Sentiment about export prospects for the year ahead is weaker than in July. But concerns that political and economic conditions abroad will limit export orders are broadly unchanged from July.

Manufacturing output increased at its slowest rate since last October, with a balance of 1% reporting growth, although a balance of 10% predicts growth in the three months ahead.

Investment intentions for the year ahead in buildings and plant & machinery have edged down since July, but there are no indications that upheaval in the financial markets has made it more difficult for manufacturers to raise finance.

Manufacturers' are now less inclined to invest for expansion, as plant capacity has become less of a concern. Indeed more firms are working below capacity than in the last 21 months.

Manufacturing job losses remain below the long-term trend, with a balance of 11 per cent of firms reporting reduced staff numbers. A similar balance expects to cut employment over the coming three months. Based on the survey, the CBI estimates 7,000 jobs were lost in the sector in the third quarter of 2007, and that 10,000 will be lost over Q4, bringing the total employed in manufacturing at the end of 2007 to 2,938,000.

The proportion of firms fearing that short supply of skilled labour is likely to constrain output remains near its July level, which was the highest since 2001. In light of these ongoing skill shortages, firms are continuing to invest in their staff, with the balance raising investment in training and retraining in the next 12 months at its highest rate in almost 10 years.

Growth in average unit costs picked up further, especially for food producers, and the prices of oil, commodities and freight have all increased robustly since July. Expectations of cost rises (a balance of 22%) are the strongest since April 1995 (+25%).

A net 11% of firms reported domestic price rises for manufactured goods, which was similar to the rate in the three months to July, and well above the average of the past decade. This rate is forecast to pick up slightly in the quarter ahead (a balance of 14%).

Ian McCafferty, CBI Chief Economic Adviser, said: "Manufacturers are understandably worried about possible fall-out from the credit squeeze, but orders growth has remained healthy, and so far few firms are finding that access to finance is hampering prospects for output or investment.

"Nevertheless, there are some tentative signs that the pace of demand and output growth will edge lower in coming months. Domestic demand is now starting to respond to higher interest rates and exporters are feeling the impact of the weaker dollar.

"One concern is the rapid cost inflation across a range of commodities, which is putting pressure on margins. Cost pressures are driven by higher prices for crude oil and rising food costs, although so far the majority of businesses have been unable to pass these onto customers."


Notes:

1. A balance is the difference between the percentage of manufacturers reporting an increase and those reporting a decrease.

2. The October 2007 CBI Industrial Trends Survey was conducted between 20th September 2007 and 10th October 2007. 529 manufacturing firms replied. During the survey period the pound averaged euro 1.44 and $2.03, while Brent Crude averaged $78.24 per barrel, compared with euro 1.48, $2.01 and $72.80 per barrel in the July survey period.

3. The CBI is the UK's leading business organisation, speaking for some 240,000 businesses that together employ around a third of the private sector workforce.

The organisation is also the UK's official business representative in the European Union, which generates more than 50 per cent of regulation affecting British firms.

With offices across the UK as well as in London, Brussels, Washington and Beijing, the CBI coordinates British business representation around the world.

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