Production on the up, but inflation looms

Posted on 21 Dec 2016 by The Manufacturer

UK manufacturers increased their pace of production in the three months to December, while sterling’s depreciation continues to fuel expectations of output price inflation, according to the latest CBI monthly Industrial Trends Survey.

The survey of almost 500 firms found that total production order books were at a 20-month high, while export order books softened for a second successive month but remained above historical norms.

Growth in output was the highest since mid-2014 and was broad-based. Just four of the 18 sectors reported a fall in production, with mechanical engineering and aerospace the main drivers of the improvement. Expectations for production growth in the first quarter of 2017 reportedly remain solid.

But expectations for output price inflation in the three months to March rose to their highest since June 2011, as the cost of imported raw materials continued to be pushed up by sterling’s depreciation.

Rain Newton-Smith, chief economist, CBI
Rain Newton-Smith, chief economist, CBI.

CBI chief economist, Rain Newton-Smith explained: “It’s good to see our manufacturers ending the year on a high note with growth in production the strongest since summer 2014 and total orders still robust.

“But the weakness of sterling is pushing up the cost of imports, and our survey shows strong signs of this feeding through to higher factory gate prices.

“After a challenging 2016, UK manufacturers will want to build on the positive momentum going into the new year, with the Government’s recent commitments on a modern industrial strategy and innovation investment a welcome tonic.”

Key findings:

  • 21% of businesses reported total orders to be above normal and 21% said orders were below normal, giving a balance of 0%, the highest since April 2015 (+1%)
  • 15% of businesses reported export orders to be above normal and 30% below, resulting in a balance of -15%
  • 35% of businesses reported a rise in output volumes, and 16% a fall, giving a balance of +19%, the highest since July 2014 (+23%)
  • Output growth is expected to remain elevated over the next three months, with 34% of companies expecting a rise and 13% expecting a fall, leaving a balance of +21%
  • Average prices are expected to increase over the next quarter, with 34% of companies expecting to raise prices and 8% expecting to cut prices, giving a balance of +26% – the highest since June 2011 (+27%)
  • 15% of businesses reported stocks as more than adequate to meet expected demand, and 5% less than adequate, leaving a balance of +10%.