UK manufacturing booming, but so are prices

Posted on 20 Feb 2017 by Jonny Williamson

Factory output continues to surge, with the CBI Industrial Trends survey registering the best performance for the manufacturing sector in two years, with the positive result fuelled in part by booming car production.

The good news for UK manufacturing was tempered by warnings that the fall in the value of sterling since the Brexit referendum vote last June is beginning to feed through into factory prices.

The CBI measures factory performance through its ‘order book balance’, which measured a +8 increase in February compared with +5 in January. The long-run average balance being -15.

Dr Steven Barr, managing director of, The Manufacturer’s consultancy division – Hennik Edge, explained: “In these uncertain times post-Brexit it is good to see that the manufacturing export spurt is continuing, albeit at a lower level than expected.

“But overall manufacturers will be increasingly worried that this windfall is being smothered by import price hikes for raw materials. They should not rely on a captive UK market, as consumers are already cutting back on spending. We can expect manufacturers to focus on cost reduction wherever possible, adding further pressure on economic downturn.”

Shopping down

A Reuters poll of economists had suggested that instead of rising to +8 the CBI balance would fall to +3, demonstrating further that grim forecasts of economic downturn on the back of the Brexit vote have yet to materialise. However, the CBI’s warnings about increased prices due to the sterling-driven rise in the cost of imports and raw materials may indicate those forecasts were not wrong, but as Hennik Edge’s Steven Barr suggests, simply premature.

This was reinforced by data last week showing that shoppers reined in their spending in January much more sharply than is customary in the post-Christmas period.

“It remains difficult to see how domestic demand will maintain its momentum when producers push through even bigger price rises,” Samuel Tombs, an economist with Pantheon Macroeconomics, told Reuters. “We continue to expect the UK manufacturing revival to lose considerable pace later this year.”

The next big test of market stability will be in the wake of the UK government triggering Article 50 next month.