Return to growth is distant despite easing of manufacturing contraction

Posted on 22 Jul 2009 by The Manufacturer

The contraction in manufacturing output is easing, but a return to growth could still be some way off, the latest quarterly CBI Industrial Trends Survey shows.

The volume of manufacturing output continued to fall in the three months to July, with 43% of firms saying it declined, and just 12% of firms saying it rose, giving a balance of -31%.

This figure represented a slower rate of decline than the previous three months, when the balance was -53%. However, a return to growth could still be some way off, with expectations for the coming three months remaining negative.

Manufacturing firms have run down their stocks even more aggressively over the past quarter, with stocks of finished goods reduced at the fastest rate in the 51 year history of the survey (a balance of -23). Despite this rapid rate of destocking, stock adequacy remains high and firms plan to reduce their finished goods inventories at a similarly sharp rate next quarter (a balance of -25).

The survey also showed that employment in the sector is continuing to fall sharply. 47% of firms reduced numbers employed and just 6% increased, giving a rounded balance of -42%.

Ian McCafferty, CBI chief economic adviser, said: “These figures reinforce our view that the road out of recession will be long and slow. The further sharp decline in export orders is of particular concern as we are not seeing much of a boost from the relative weakness of Sterling.

“There are also further indications that the inventory cycle may not be turning as quickly as many had hoped, with some manufacturers still having excess stocks of goods.”

More positively, the fall in business sentiment has slowed further, and credit or finance constraints have eased back to pre-Lehman levels. The balance for optimism about the business situation was -16%, which was the least negative since October 2007. Meanwhile those citing credit or finance as a constraint on output eased back to 5% from a record high of 26% in April.

Mr McCafferty said:

“While the figures on credit constraints appear encouraging, they should not be taken as a sign that bank lending is flowing freely again. Larger sized firms have been able to tap into alternative sources of external finance, through share and bond issuance. For smaller firms however, who do not have as wider range of funding options, credit constraints have not eased.”

Capital investment plans for the year ahead continue to be scaled back at a rapid pace. However, the cut-backs to planned investment in product and process innovation, and training and re-training have slowed significantly since April.

Constraints to investment from internal and external finance have also fallen since the last survey, and as with the credit/finance constraint to output, are now back to pre-Lehman levels.