Inflationary swings and output roundabouts

Posted on 26 Apr 2011 by The Manufacturer

Manufacturers are still experiencing growth in demand but inflationary pressures are in danger of derailing the sector's recovery, the latest Quarterly Industrial Trends Survey from the Confederation of British Industry suggests.

Strong domestic and export demand – with growth in both at the highest levels since April 1995 – led to a +20 per cent balance for output in the last three months among the 453 manufacturers that responded to the survey. Furthermore, output is expected to climb again for a balance of +22 per cent of companies over the next three months. Companies said ongoing restocking programmes are also attributable for the growth.

In response, employment went up for the third quarter in a row among manufacturers, with a balance of +15 per cent representing the highest swelling of payrolls since January 1974.

However, production costs have gone up markedly, with average unit costs up for a huge balance of +53 per cent of manufacturers. As a result, domestic and export prices are up for balances of +29% and +30% of companies respectively – the biggest rise for the latter since April 1984.

Prices are expected to increase sharply again over the next three months.

Despite CBI director general John Cridland’s assertion that manufacturing’s recovery “remains well on track”, Chris Williamson, director and chief economist of research company Markit and author of the monthly UK Purchasing Managers’ Index, describes the findings as “an unwelcome picture, but one that is starting to sound all-too familiar”.

“This is not a good start to the second quarter,” he said. “Rising costs in the goods-producing sector will add to inflationary pressures. The extent to which this translates into higher inflation is likely to be limited, however, because retailers may be forced to offer increasing discounts in the face of weakened household sentiment.

“The survey follows recent downbeat official data, which showed the sector to have stagnated in February, and adds to fears that manufacturers are struggling to help sustain the fragile-looking economic recovery in 2011.”

In the survey, 46% of companies said they plan to invest in expanding their capacity over the next twelve months and investment intentions on the whole are strong. A balance of +7 per cent of firms plan to spend on plant and machinery and +28 per cent on product and process innovation (+28%) over the coming year, compared with the previous 12 months.