Strong export performance from manufacturers but cost pressures remain

UK manufacturers enjoyed strong growth in demand from customers in the UK and overseas in the first quarter of 2017 but a combination of the weak pound and recovering commodity prices has seen cost pressures continue to build.

According to the latest quarterly CBI Industrial Trends Survey of 397 manufacturers, domestic orders had improved at the fastest pace since July 2014 in the three months to April. Meanwhile export orders recorded the strongest growth in six years, supported by strong rises in competitiveness, particularly in non-EU markets which improved at a record pace.

The weak pound continued to push up costs, with manufacturers reporting the strongest rises in unit costs in six years.

Output growth firmed to a three-year high and is expected to accelerate over the next quarter. Manufacturers’ anticipate that new orders will grow more moderately over the near-term, largely owing to a predicted slowdown in domestic demand outweighing export orders growth – expectations for the latter are at their strongest in over two decades.

Companies are also upbeat in their year-ahead expectations for exports, with optimism posting the biggest gain in over four decades, contrasting with their assessment about the overall business situation which was unchanged.

There was a softening in investment plans across the board, particularly those for buildings and plant and machinery, with the latter at its most negative for nearly six years. When queried about potential limits on capital spending over the next year, the proportion of firms citing inadequate net returns climbed to the highest in a decade. Headcount saw decent growth, but hiring intentions for the next three months are muted, the report says.

Rain Newton-Smith, CBI Chief Economist, said: “Exports have surged and firms are at their most optimistic about selling overseas in over four decades. Even so, the combination of the weak pound and recovering commodity prices means that cost pressures continue to build, and manufacturers report no sign of them abating over the near-term.”

Key findings:
·         Domestic orders rose at their fastest pace (+20%) since July 2014 (+23%). Export orders growth accelerated to (+22%) the highest since April 2011 (+24%)
·         42% of businesses reported an increase in total orders, and 17% a decrease, giving a balance of +25%, the highest since April 1995 (+27%)
·         36% of firms said the volume of output over the past three months was up and 14% said it was down, giving a balance of +22%, the highest since July 2014 (+23%)
·         26% of manufacturers said employee numbers were up, and 19% said they were down, giving a balance of +7%
·         23% of firms said they were more optimistic about the general business situation than three months ago and 21% were less optimistic, giving a rounded balance of +1%.  Optimism about export prospects for the year ahead (+30%) climbed at the quickest rate since July 1973 (+33%)
·         Firms’ competitiveness in the UK grew firmly over the past three months (+12%), while their competitiveness in non-EU markets rose at the fastest pace in the series’ history (+27%)
·         Average domestic prices (+27%), average export prices (+24%) and average unit costs (+45%) all rose at the fastest pace since April 2011 (+53%)
·         Manufacturers intend to spend less on buildings (-15%) and plant & machinery (-10%) over the next 12 months than they did over the previous twelve months.

Key findings – looking ahead:
·         Total new orders (+14%), domestic orders (+7%) and export orders (+24%) are expected to continue to grow strongly over the next quarter
·         Expectations for output growth (+16%) remain solid
·         Average domestic prices (+29%), export prices (+20%) and unit costs (+41%) are all expected to rise quickly again over the next quarter.