By Claire West

The manufacturing sector expects a solid rise in output over the next three months driven by predictions for a stronger increase in export orders, the CBI said today. The business group said that this follows an easing of production growth in the past quarter.

Of the 420 manufacturers that responded to the Quarterly Industrial Trends Survey, 32% expect a rise in output volumes, and 14% a fall, giving a balance of +18%. This follows a figure of +9% for the last three months.

This is primarily driven by expectations of a faster increase in exports in the coming quarter, with a balance of +15% expecting volumes of export orders to rise. Domestic order growth is more subdued with a balance of +2% expecting an increase.

Looking ahead to the next quarter, the volume of total new orders is expected to grow to a balance of +12%, similar to the +11% recorded for the past three months.

The expected predictions of strong output growth follow a slightly softer patch over the past three months, as the temporary boost to second-quarter output from the turn in the stock cycle faded. Stockbuilding will have less of an impact going forward. In the coming quarter 14% expect stocks of finished goods to increase, while 18% said they would fall, giving a balance of -4%, compared to a balance of +3% for the three months to October.

Following four consecutive quarters of rising optimism, overall business sentiment was little changed on three months ago.
The survey showed that 24% of manufacturers said that they were more optimistic than the past quarter, and 23% said they were less so, giving a rounded balance of +2%.
Employment and investment trends in the manufacturing sector are positive. Employment saw the greatest rise since January 1989 with a balance of +6% of firms saying that they had taken on new staff.
In addition, investment intentions for the coming year have strengthened further. Manufacturers said they plan to spend more on plant and machinery over the year ahead: a balance of +10% said that they would increase capital expenditure in this area, with investment plans at their strongest since July 1997 (+21%).
Furthermore, fewer manufacturers (41%) think uncertainty about demand will limit their investment plans over the next 12 months. This is the lowest figure since January 2008 (41%) and compares with 54% for the previous quarter.
Manufacturers’ profit margins were squeezed further as costs rose by more than prices. Average unit costs climbed particularly sharply for the third successive quarter, with 36% saying that they increased, and 8% saying that they fell, giving a rounded balance of +29%. This is the highest figure since October 2008 (+56%). But prices were raised only very slightly: the balance for average domestic prices was +3%, and +5% for export prices.
Ian McCafferty, the CBI’s Chief Economic Adviser, said:
“The recovery in the manufacturing sector is well grounded and looks set to continue, despite a soft patch last quarter, when production growth slowed as firms had expected. Over the next three months, firms predict a strong rise in output driven by predictions of firmer export orders growth, while support from stockbuilding fades.
“It is particularly encouraging that firms have taken on more staff and plan to invest more in plant and machinery in the year ahead.
“However, cost pressures show no sign of receding, driven by higher commodity prices and import costs. This is putting increasing strain on manufacturers’ profit margins, given that costs are not being fully passed on as higher prices.”
Output price inflation is expected to stay muted over the next three months, with a balance of +6% expecting their average domestic prices to go up, and a figure of +4% for export prices. But average unit costs are set to rise solidly again, with a balance of +21% expecting an increase.
Looking ahead, credit or finance is seen as a constraint to output growth over the next quarter by 9% of manufacturers, compared with 3% in July. This has risen for the first time since January and is back above its long-run average (4%).
But, fewer manufacturers (71%), highlighted orders and sales as a factor likely to limit their activity over the coming quarter, compared with 77% in July. This figure is the lowest since January 2008 (69%).

More firms (a balance of +20%) also expect to increase expenditure on product and process innovation over the next year compared to the previous twelve months. This is the highest figure since January 2008 (+20%).