Manufacturing steps down a gear

Further evidence of a slowdown in the economy was revealed in the latest snapshot of the manufacturing sector from the CBI.

The December Industrial Trends Survey showed that while total order books are still considered broadly 'normal' by manufacturers, demand is easing slightly. And though output is expected to continue to grow next quarter, the balance of firms reporting this has weakened.

The survey, which drew 557 respondents, also revealed that manufacturers intend to raise their prices at a similar pace to the last few months over the next quarter, indicating they are still confident about passing on some of their rising energy and commodity costs.

Conducted between 20 November and 5 December, the results showed that 25% of firms had above normal order books, and 22% below normal. The rounded balance of +2% is weaker than last month's near 12-year high (+8%), but still a positive figure and stronger than the long-term average of -15%.

Demand appears to be shifting from the UK to overseas. Export order books saw their first positive balance (+2%) since February, a particularly strong figure when compared to recent years. This is likely to reflect the weakening of the pound against the euro, encouraging more UK exports to Europe.

Manufacturers' expectations for output growth have fallen over the course of the year. This month's balance (+3%) still indicates growth, albeit modest, but is the lowest in almost two years (January 2006, +1%), and well below the average of +15% seen over 2007.

For the third month in a row, a balance of +14% said stocks were more than adequate.

A balance of +15% of manufacturers intend to raise their prices over the coming three months. Though lower than November's figure (+21%), this is still much higher than the long-term average of -2, as rising commodity costs are being passed on to customers.

CBI Chief Economic Adviser Ian McCafferty said:

"The manufacturing sector has become much leaner in recent years, which has enabled it to largely withstand the triple whammy of rising commodity costs, a strong pound against the dollar, and five interest rate rises.

"Although firms are now reporting weakening demand and expect output to grow only modestly next quarter, it is a case of the sector changing from fifth gear to fourth, certainly not juddering to a halt.

"Firms still feel able to push through price increases in the next three months. And even as the domestic market slows, they are enjoying a period of relatively strong demand from overseas, as the pound has been falling against the euro and stimulating trade with the Eurozone."

Notes:

1. The survey was conducted between 20 November and 5 December 2007. 557 manufacturers responded.

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

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.