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, the CBI said today (Thursday).
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% of survey respondents said they had gone up in the past three months, while 10% said they had decreased. The resulting balance of +40% is the highest since July 1990 (+45%) 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% of firms expecting costs to rise over the period.
Average domestic prices increased strongly, with the balance of +21% reporting a rise the highest since April 1995 (+29%). Export prices grew at a slower rate (+12%), although that was last topped in July 1995 (+13%). 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%), and a similarly flat quarter is expected ahead. Domestic orders fell back noticeably (-13%) and are expected to fall again. Export order growth declined more moderately (-5%) and, more positively, a balance of 5% 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% said they were below normal in April, the weakest since October 2006 (-20%).
Employment in manufacturing continued to fall at a rate in line with the long-run trend, with a balance of 15% of firms reporting job losses, and this pace of decline is expected to continue over the coming quarter (-17%). 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%).
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% of firms consider it a constraint, up from 41% 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%.
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."
1. A balance is the difference between the percentage of manufacturers reporting an increase and those reporting a decrease.
2. The April 2008 CBI Industrial Trends Survey was conducted between 25th March 2008 and 9th April 2008. 466 manufacturing firms replied. During the survey period the pound averaged euro 1.27 and $1.99, while Brent Crude averaged $103.71 per barrel, compared with euro 1.37, $1.99 and $93.76 per barrel in the January survey period.
3. 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.
The organisation is also the UK's official business representative in the European Union, which generates more than 50 per cent of regulation affecting British firms.
With offices across the UK as well as in Brussels, Washington and Beijing, the CBI coordinates British business representation around the world.