Manufacturers pessimistic as record costs force up prices

The 50th Industrial Trends survey from the CBI reveals that persistently high costs coupled with firms' expectations of slowing demand have led to a widespread drop in business confidence. Over the last three months, 65% of manufacturers said they had experienced rising costs while just 7% reported a fall. The resulting balance of +58, the highest since October 1980, comes on the back of soaring oil prices, up by over a third in the last quarter. And companies expect costs to increase at a similar rate in the next three months. Manufacturers have attempted to offset some of the damage to their profit margins by raising prices. For two quarters in a row, domestic prices have risen markedly while export prices have also gone up at an accelerated rate. This quarter’s figures are the highest since April 1995, and prices are expected to increase over the next three months at the highest rate since January 1990 for domestic prices, and January 1995 for export prices. Firms’ mood about the business situation darkened considerably for the fourth quarter in a row, but this time sentiment has taken an even greater dive – the balance of -40 is the weakest since October 2001. Levels of activity in the last three months held up reasonably well, however, with firms reporting manufacturing output as flat, much as expected. While domestic orders fell markedly again for manufacturers, export orders held up well and were broadly stable. In the monthly question asked about manufacturers’ total order book levels, a balance of 8% of firms considered they were below normal in July - a return to the negative perceptions recorded in April and May but still considerably above the long term average. However, expectations for manufacturing activity are less positive for the coming quarter, with the weakest balances for expected output, domestic orders and export orders recorded for at least five years. There was a surprise let-up in the pace of job shedding over the last three months, with the slowest rate of job losses since October 2004. Expectations for the coming quarter are much more negative, however, with a balance of 27% expecting to cut jobs. Based on the survey results, the CBI forecasts that 10,000 jobs were lost in the second quarter of 2008 and 26,000 will go in the third quarter. Investment intentions have weakened since the last survey. Plans for plant and machinery investment continue to deteriorate to its weakest point since October 2002. Ian McCafferty, the CBI’s Chief Economic Adviser, said: "Cost pressures on manufacturers have been noticeable for over four years but in the last three months they have been their most intense for nearly three decades. "So, it comes as little surprise that manufacturers are passing some of these higher costs onto customers, although this is unlikely to rescue profits from a margin squeeze. "The record oil price peaks in the last three months have pushed down further on business confidence and lowered firms' expectations for demand in the coming quarter. Even exports, which so far have helped bolster manufacturers' order books, are expected to soften despite the boost to competitiveness from weaker sterling."