Manufacturers are raising the prices of their goods to try to counter the fiercest increases since 1990 in unit costs, driven by more expensive energy and raw materials, according to the CBI.
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 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 per cent of survey respondents said they had gone up in the past three months, while 10 per cent said they had decreased. The resulting balance of +40 per cent is the highest since July 1990 (+45 per cent) and reflects the soaring cost of world energy, and raw materials. These cost pressures are expected to continue over the coming three months, with a balance of +34 per cent of firms expecting costs to rise over the period.
Average domestic prices increased strongly, with the balance of +21 per cent reporting a rise the highest since April 1995 (+29 per cent). Export prices grew at a slower rate (+12 per cent), although that was last topped in July 1995 (+13 per cent). 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 (a balance of -3 per cent), and a similarly flat quarter is expected ahead. Domestic orders fell back noticeably (-13 per cent) and are expected to fall again. Export order growth declined more moderately (-5 per cent) and, more positively, a balance of 5 per cent expects growth next quarter.
Looking at the monthly data gathered by the survey, perceptions of total order book levels dipped quite sharply – a balance of 13 per cent said they were below normal in April, the weakest since October 2006 (-20 per cent).
Employment in manufacturing continued to fall at a rate in line with the long-run trend, with a balance of 15 per cent of firms reporting job losses, and this pace of decline is expected to continue over the coming quarter (-17 per cent). 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. This is the steepest fall since April 2003 (-27 per cent).
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 per cent of firms consider it a constraint, up from 41 per cent in January.
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 to 21 per cent.
Ian McCafferty, CBI Chief Economic Adviser, said: “Fears of slowing demand alongside rising prices have become a reality in the manufacturing sector over the past quarter, as it readjusts 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. 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.”