Manufacturers increase prices

These cost pressures are intensifying even as orders and output are showing signs of easing in a sector that has so far proven resilient to recent economic shocks. The quarterly version of the CBI Industrial Trends Survey published yesterday (24 April) revealed that domestic and export prices are growing at their fastest pace since 1995, and that similar rates are expected over the coming three months, while cost pressures are forecast to continue. Asked about average unit costs, 50% of survey respondents said they had gone up in the past three months, while 10% said they had decreased. The resulting balance of +40% is the highest since July 1990 and reflects the soaring cost of world energy, and raw materials, the survey report said. These cost pressures are expected to continue over the coming three months. Average home prices increased strongly, while export prices grew at a slower rate. It appears that following the margin squeeze of the second half of 2007, manufacturers are having to pass on growing cost pressures over the next three months. Manufacturing output failed to grow in line with firms' expectations - instead firms reported little change and a similarly flat quarter is expected ahead. Looking at the monthly data gathered by the survey, perceptions of total order book levels dipped quite sharply - a balance of 13% said they were below normal in April, the weakest since October 2006 (-20%). Employment in manufacturing continued to fall at a rate in line with the long-run trend, with a balance of 15% of firms reporting job losses, and this pace of decline is expected to continue over the coming quarter. Based on the survey, the CBI estimates that 13,000 jobs were lost in the sector in the first quarter of 2008, and that 18,000 will be lost in Q2. Business sentiment fell for the third consecutive quarter, with a balance of 23 per cent of firms less optimistic about the business situation than they were three months ago. Investment intentions have weakened but remain positive for product and process innovation, and training and retraining. However, they are slipping lower for plant and machinery. Uncertainty about demand is now considered slightly more likely to limit investment, as 50% of firms consider it a constraint. Despite the turmoil in the banking world caused by the credit crunch, the proportion of firms reporting concerns about credit or finance as a likely constraint on output or orders has not increased significantly in the past three months. However, the percentage worried about political and economic conditions abroad as a constraint to export orders has risen. CBI Chief Economic Adviser Ian McCafferty said fears of slowing demand alongside rising prices hade become a reality in the manufacturing sector over the past quarter, as it readjusted to a weaker economic outlook. "Manufacturers are being forced to pass on higher costs to customers by increasing prices, and are no longer able to absorb continuous cost increases into their profit margins,” he said. "The Bank of England now faces particularly difficult decisions on the timing of any further interest rate cuts as it must weigh up these strong inflationary pressures against the needs of a slowing economy."