Inflation casts dark cloud over continuing manufacturing recovery

THE manufacturing sector continues to go from strength to strength with domestic demand recovering and further boosting output growth, the CBI has said.

However, the organisation said price pressures remain intense – a point emphasised by the news inflation rose to 4.4% in February.

Firms have now predicted a rapid rise in output prices over the next three months, with expectations close to their last peak in July 2008.

Responding to the latest monthly Industrial Trends Survey, 26% of manufacturers said that total orders were above normal, and 21% said they were below. The resulting balance of +5% is the highest since March 2008 (+7%), marking the first time they have been above normal since then.

By contrast, export order books weakened slightly, with 29% of firms reporting they were above normal, and 24% below. But while the resulting balance of +5% is down on February (+11%), the CBI said it remained strong by historical comparison and export orders remained above par.

In line with improving demand, manufacturers’ expectations for output growth have strengthened further in March’s survey with 38% of firms predicting an increase over the next three months, and 11% a fall. The resulting balance of +27% is the strongest since February 2007 (+28%) and above last month’s already robust expectation (+23%).

Inflationary pressures were largely driven by the high price of oil and other commodities.

A balance of +33% of firms predict they will have to raise output prices over the coming quarter, following similar expectations in February (+32%) and January (+31%).

Ian McCafferty, CBI chief economic adviser, said: “The manufacturing recovery is picking up pace, with firms predicting robust output growth over the next quarter. Total order books have strengthened further this month, and were above normal for the first time in three years, as a firming of domestic demand adds to the healthy export outlook.

“However inflationary pressures in the manufacturing sector remain very acute, as firms look to pass on sharply increased raw material costs. Price expectations for the coming quarter now broadly match their last peak in summer 2008.”

Business leaders in the region said they recognised the pressure the inflation rise would have on the Bank of England but they have urged the MPC to hold its nerve.

Christine Braddock, president of Birmingham Chamber of Commerce, said: “We are calling on the Bank of England Monetary Policy Committee to hold its nerve and not increase interest rates.  Although inflation hurts business, low interest rates are benefiting them, especially the worst hit manufacturers.”