The decline in UK manufacturing output has eased considerably in the past three months, and the sector's prospects look brighter, with sentiment improving and modest growth expected in the three months ahead, the CBI said today.
Its latest Quarterly Industrial Trends Survey also revealed that the weakness of sterling is helping export competitiveness, although stocks are still being run down and difficult access to finance is constraining output and investment.
The volume of manufacturing output continued to fall in the three months to October, with 34% of firms saying it fell, and 26% saying it rose, giving a balance of -8%. This marks a much slower rate of decline than in July’s survey (-31%), Asked about the next three months, a balance of 4% of firms expects growth, which is the highest since January 2008 (+9%).
Domestic demand continued to slow in the three months to October, but marginal growth is expected in the three months ahead (a balance of +3%). Helped by a weakened sterling, the contraction in demand for exports was less than expected and firms expect export orders to grow over the coming three months (a balance of +9%).
Sentiment about export prospects for the year ahead is, at a balance of +16%, the strongest since July 1995 (+21%). And a net 10% are now more optimistic about the overall business situation than they were three months ago, which is the first improvement in sentiment since April 2007 (+16%).
Ian McCafferty, CBI Chief Economic Adviser, said:
“Having endured a brutal recession, manufacturers appear to be turning the corner, with optimism up and mild growth in output and demand expected over the next three months. Firms finally seem to be benefiting from a weakened pound, as global markets recover, helping to lift demand for UK exports.
“However, the recovery from the downturn will be protracted and weak – investment will remain constrained and unemployment will continue rising. The tight flow of credit to many manufacturers remains a worry, and firms which are unable to get funding to meet orders could see their hopes of recovery stall.”
Firms are planning to spend more on innovation in the next twelve months, while expenditure on staff training and plant & machinery will be virtually unchanged from the levels of the past year. However, over three quarters of firms reported that they have spare capacity, and this is likely to constrain investment levels going forwards.
Manufacturers are also increasingly worried about the cost and availability of finance. 14% said an inability to raise external finance was limiting capital investment, which marks an increase from 8% in July.
Firms continued to destock, and the stock levels of finished goods fell at a record rate for the second successive survey. Further but more modest stock declines are anticipated in the coming three months, although stock levels have now moved to a more neutral position, with a balance of only 10% saying they are more than adequate.
Employment in the sector fell quite heavily, but the balance of 34% reporting a drop in staff numbers was an improvement on July (-42%) and is forecast to ease further in the coming three months (-23%).