Export performance remains a risk looking ahead

New orders continued to expand for British manufacturers in the three months to January, but firms expect their export orders to tail-off in the coming quarter, according to the latest CBI Quarterly Industrial Trends Survey.

The survey of 467 firms saw a rise in the volume of total new orders, led by strong demand at home and very modest growth in export orders. Manufacturing output rose at a similar pace to the previous quarter and it was notable that costs and prices fell, with unit costs edging down for the first time in over twelve years. Average domestic price deflation is at its fastest rate since 2010.

Meanwhile, numbers employed in the manufacturing sector continued to grow at a solid pace.

Over the next three months, firms anticipate new export orders to be flat, acting as a drag on total orders growth, while domestic orders are set to continue rising, if at a somewhat slower pace compared to previous quarters. Output is expected to continue growing modestly.

Milling piece (PD)However, access to skilled labour and capacity constraints are key factors cited as likely to limit output in the next quarter, and significantly more respondents expect price competition to limit export orders. Firms do, however, remain more optimistic about the general business situation than three months ago.

Looking to the year ahead, manufacturers' plans for investment in plant and machinery have strengthened, while plans for spending on product and process innovation and training/retraining remain robust.

Rain Newton-Smith, CBI Director of Economics, said:

"British manufacturers are still heading along the right path: new orders are up, bolstered by domestic demand and more people are getting work in factories across the UK.

"Exports have grown modestly, but there is a feeling that we will not see a repeat in the next quarter, especially with the Eurozone still treading water and battling deflation.

"Falling oil prices should be positive for the UK economy overall, benefitting households and lowering costs for firms, although North Sea oil producers are being hit. With overall cost pressures contained as a result, it's no surprise to see average domestic prices in the manufacturing sector falling at the fastest rate for five years."

Key findings – three months to January 2015

  • 36% of businesses reported an increase in total new orders, and 17% a decrease, giving a balance of +20%
  • The rounded balance for new domestic orders (+15%) was well above the long-run average (-5%) with 30% of respondents reporting orders up and 16% down.
  • Export orders saw a return to growth (+4%) following a fall in the previous quarter (-7%)
  • 27% of manufacturers said employment numbers were up, and 15% said they were down, giving a balance of +12%
  • 25% reported a rise in output volumes, and 15% a decrease, giving a balance of +10%
  • 27% of firms said they were more optimistic about the general business situation than three months ago, and 12% less, giving a balance of +15%
  • Domestic and export price inflation was negative this quarter (-9% and -6% respectively). Unit costs also fell (-5%)
  • Manufacturers' investment intentions compared to the previous twelve months have picked up for plant and machinery (+16%), and those for product and process innovation (+27%) and training/retraining (+32%) remain strong
  • Respondents reported a record high (since October 1999) rise in competitiveness within the UK (+16%)
  • Competitiveness in EU markets deteriorated again (-7), but at a slower pace than the second half of 2014, and competitiveness in non-EU markets was flat.
  • The proportion of firms citing prices as a factor likely to limit their export orders was the highest (56%) since January 2013 (56%).

Key findings – next quarter

  • 25% of manufacturers expect total new orders to increase, and 14% expect them to fall, giving a rounded balance of +11%, the lowest since October 2012 (+8%)
  • A rounded balance of +12% expect new domestic orders to rise (23% expect an increase, and 12% a fall), but following the slight increase this quarter, export orders are predicted to be flat (+1%;  17% expect a rise, and 16% a fall)
  • 25% of firms anticipate a rise in output volumes, and 12% a fall, giving a balance of +13%
  • 23% expect employment to increase, and 11% expect it to decrease, giving a balance of +13%
  • Expectations for growth in domestic and export prices remain negative (-6% and -2% respectively). Unit costs are expected to also fall slightly further (-5%).Separately, the CBI published monthly figures for January, which showed that total order books among manufacturers remained strong (balance of +4%) while export order books weakened (-20%).

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