Manufacturing picks up - but 25,000 more jobs will go

A conflicting picture of the state of British manufacturing has emerged from the latest round of surveys and statistics. The figures - from the CBI, the Office for National Statistics (ONS), and the British Chambers of Commerce (BCC) - suggest, among other things, that:

• confidence among British manufacturers has bounced back since the start of the year, despite order books failing to revive;

• 26,000 more jobs are likely to be lost in manufacturing during the first quarter of this year; and

• manufacturing export balances, cashflows and confidence strengthened during the last quarter of 2004, but home sales weakened, and investment in plant and machinery declined.

The official figures from the ONS reveal that manufacturing output rose 0.6% from November to December, with improvements in most sectors, led by food, drink and tobacco with a 1.3% rise. The ONS has also revised its figures for November from a 0.1% drop in output to a 0.2% rise. Manufacturing output in 2004 was 1.3% up on 2003 - the best rise since 2000.

But, according to BCC`s economic advisor David Kern, the ONS figures confirm the BCC`s assessment that "while the sector is not in recession, its overall performance remains extremely disappointing. The crucial fact is that manufacturing is persistently failing to sustain recovery. The negligible 0.2% rise in Q4 manufacturing output comes after a 0.8% decline in Q3."

The BCC, Kern adds, remains "very concerned over the sector`s vulnerability and underlying weakness. On the basis of available evidence, the prospects for manufacturing are poor".

The BCC`s own quarterly economic survey shows that, while the manufacturing sector`s export balance during the last quarter of 2004 was the highest for eight years, the domestic balance was the lowest since the third quarter of 2003. Employment and investment in plant and machinery have both declined.

BCC director-general, David Frost (above), says that the results contain "worrying signs for manufacturing" and "reinforce our concern over the sector`s persistent inability to sustain recovery".

The CBI`s latest monthly industrial trends survey suggests that confidence among British manufacturers has bounced back since the start of the year, despite order books failing to revive. Manufacturers expect to increase production at the fastest rate over the coming three months since last summer, even though they regard current order books as being weak. They are more confident about short-term prospects for demand than they have been for some time. Many also expect to be able to raise prices.

Of the 811 manufacturers quizzed by the CBI during the three weeks to 16 February, 38% said they expected their output to be up over the next three months, while 19% said it would be down. The balance of 19% is the highest figure since August 2004.

This is despite order books continuing to be well below normal. After a relatively good performance last summer, order books fell back in the Autumn and have so far failed to revive. A fifth of the manufacturers said their order books were above normal, but 30% said they were below. Orders have now been below normal for six months in a row.

Rising output may be partly due to a desire to make up depleted stocks, because stocks of finished goods are below the average level of the past ten years. But that cannot be the entire explanation because the survey shows that stocks have already edged up from January`s seven-month low.

"This is a mixed picture," says the CBI`s head of economic analysis, Doug Godden. "Manufacturers are more optimistic about future production. But that is not based on any clear recent improvement in order books and suggests they are relying on demand improving in the near future.

"At the same time, cost pressures are still intense, especially from high raw material and fuel prices. Firms selling to other businesses are much more likely to be able to pass on those cost increases than those selling directly to consumers, leaving the business sector to absorb the full impact of increased costs."

Export order books were further below normal than order books as a whole, but were slightly stronger than last month despite a modest rise in the value of sterling. A balance of -20% compares with -26% in January, but with +2% as recently as last August.

More manufacturers expect to put prices up over the coming three months than expect them to fall. Makers of capital and intermediate goods, rather than consumer goods, are most likely to raise prices.

Across all respondents, 25% said the price at which domestic orders are booked will go up while 14% expected them to fall. This marks the eleventh consecutive month during which companies have been able to increase the price of manufactured goods.

A separate CBI regional survey has recorded "a widespread fall in export orders" with orders in the West Midlands and the North West dropping at the fastest rate for three years. Domestic orders have also fallen and the CBI`s manufacturing members expect to axe about 25,000 jobs in the first quarter of 2005, with only Scotland escaping the cuts.