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).
Export demand was also disappointing, despite the relative weakness of Sterling, which makes British goods cheaper for foreign customers. The balance reporting a fall in export orders over the last three months was -38%, compared with -39% the previous quarter, and expectations last quarter of -18%.
The sharp fall in export orders came despite firms cutting prices in foreign markets. The balance for export prices was -26%, from -10% last quarter, compared to a balance for domestic prices of -20%, from -17%.
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.
1. A balance if the difference between the percentage of manufacturers reporting an increase and those reporting a decrease.
2. The July 2009 CBI Quarterly Industrial Trends Survey was conducted between 24th June 2009 and 8th July 2009. 517 manufacturing firms replied.
3. During the survey period the pound averaged euro 1.17 and $1.64, while Brent Crude averaged $67.20 per barrel, compared with euro 1.09 and $1.46 and $51.63 per barrel in the April survey period.
4. The CBI is the UK's leading business organisation, speaking for some 240,000 businesses that together employ around a third of the private sector workforce. With offices across the UK as well as representation in Brussels, Washington, Beijing and Delhi the CBI communicates the British business voice around the world.