25 January 2017

  |  CBI Press Team

Press release

Demand recovers, cost pressures build - Scotland Quarterly Industrial Trends Survey

Stronger domestic and overseas demand drove an improvement in new orders over the past quarter, though cost pressures continued to build, according to the quarterly CBI Scottish Industrial Trends Survey.

Demand recovers, cost pressures build - Scotland Quarterly Industrial Trends Survey

DEMAND RECOVERS, BUT COST PRESSURES BUILDING – CBI SCOTLAND INDUSTRIAL TRENDS SURVEY

Stronger domestic and overseas demand drove an improvement in new orders over the past quarter, though cost pressures continued to build, according to the quarterly CBI Scottish Industrial Trends Survey.

The latest survey of 38 Scottish manufacturing firms shows that demand has shown an improvement following the deterioration seen in the previous quarter. Respondents are relatively upbeat about the coming quarter too, with domestic and export orders expected to continue to grow solidly.

Output growth was more subdued, but is anticipated to pick-up alongside expectations that demand will hold up, with the share of manufacturers citing orders as a potential constraint on production dropping to the lowest since October 2014. However, access to skilled labour is an increasing worry.

This has led to greater concerns surrounding capacity with the proportion of firms reporting that they were operating below their productive potential falling to a two-and-a-half year low. As such, investment intentions were strong with a growing share of respondents citing expanding capacity as a driver.

Unit costs rose rise at the fastest pace in nearly four years as sterling depreciation filters through. Manufacturers increased prices for both domestic and overseas markets at a quicker rate compared with the previous quarter.

CBI Scotland Director Hugh Aitken said:

“The weaker pound is driving export optimism for the year ahead, but is having a detrimental impact on costs for firms and ultimately for consumers.

“The UK Government’s new Industrial Strategy should act as a spur for the Scottish Government to present its own plans for catalysing private sector growth.

“Our members stand ready to help the Government present a shared long-term vision for the key sectors and regions of the economy and evidence-based plans for government and business collaboration.”

Key findings

The January 2017 CBI Industrial Trends Survey was conducted between 16th December and 12th January. 38 Scottish manufacturing firms replied. During the survey period the pound averaged €1.17 and $1.23, while Brent Crude averaged $56 per barrel, compared with €1.14 and $1.28, and $50 per barrel in the October survey period. 

Business sentiment

  • Business optimism (+30%) improved at the quickest pace since July 2014 and comfortably above April’s pre-referendum level (-14%). Export optimism (+15%) built on October’s improvement, rising at the highest rate since April 2015.

Activity

  • The volume of new orders (+24%) rose sharply after having declined in October (-17%) underpinned by a strengthening in growth of both domestic orders (+22%) and export orders (+20%)
  • Firms expect new orders (+16%) to continue to grow robustly, while the outlooks for both domestic orders (+12%) and export orders (+13) are similarly healthy
  • The pace of output (+3%) slowed from the figure seen in October (+8%) though expectations for the coming three months (+10%) climbed to the highest level since April 2015
  • Employment (+6%) improved over the quarter after having fallen in October. Looking ahead, manufacturers anticipate that staffing numbers will improve further still (+8%), though concerns about skilled labour (31%) being a potential constraint on output was the highest since July 2014.

Prices and costs

  • Average unit costs (+43%) climbed at the quickest rate since April 2013, considerably outpacing expectations in October (+32%), and are forecast to continue to rise over the next three months (+31%)
  • Amid these cost pressures, domestic prices (+5%) rose whereas export prices (+8%) picked-up considerably to rise at the fastest rate since July 2013
  • Short-term expectations surged for both domestic prices (+21%) whereas export prices (+8%) point to similar levels of growth over the next quarter
  • Even so, the share of firms reporting that prices would be a likely constraint on export orders (18%) was the lowest since October 2009.

Capacity

  • The proportion of firms reporting that they were working below capacity (44%) was the lowest level since July 2014
  • Year-ahead investment intentions strengthened for product & process innovation (+11%) and training & retraining (+13%)
  • The proportion of firms who cited uncertainty about demand (27%) as a reason for limiting capital investment was the lowest in nearly two decades.