By Daniel Hunter

Manufacturing orders fell in the three months to October, while output was flat, the CBI said today (Wednesday).

However, expectations for both orders and output over the next three months are for moderate growth, while the employment and investment picture remains relatively positive.

Of the 395 manufacturers responding to the latest CBI quarterly Industrial Trends Survey, 25% said output rose, while 28% said it fell. The resulting balance of -3% is the lowest since October 2009 (-8%), and disappointed expectations of growth (+11%). However, over the next three months, manufacturers do expect a moderate recovery in output, with a balance of +12%, which, if realised, would be the strongest growth since the three months to January 2011.

The volume of total orders fell unexpectedly over the last three months, with both domestic orders (-10%) and export orders (-17%) dropping below their long-run averages (balances of -7% and -8% respectively). Nonetheless, expectations for the coming three months have not been dented by these results: expectations for domestic orders growth remain unchanged relative to the previous quarter (+4%), while export orders are once again expected to be broadly flat (+2%).

However, the survey suggests that concerns about political and economic conditions abroad have risen. The proportion of firms citing this as the factor most likely to limit export orders increased from 25% in the three months to July to 34%, well-above the long-run average of 22%.

In line with somewhat softer activity, optimism regarding the business situation and export prospects for the year ahead both deteriorated (-12% and -19%). Furthermore, concern grew over orders and sales acting as a constraint on output in the coming three months (cited by 74% of firms, compared to 62% in the three months to July).

However, other indicators in the survey held up somewhat better. Numbers employed rose for the ninth-consecutive quarter (+5%), the longest run of rising headcount in the quarterly survey’s history (since 1972).

On the whole, investment intentions for the year ahead also saw a small improvement. In particular, a balance of +22% of respondents intend to invest more in product and process innovation compared to the previous 12 months, while +14% are planning to increase spending on training and retraining. Even though firms still plan to spend less on buildings and plant & machinery relative to the past 12 months (with balances of -12% and -4% respectively), investment intentions for this category have not deteriorated any further from the previous quarter.

“Domestic and overseas demand have both slipped unexpectedly this quarter, while output growth has tailed off," Anna Leach, CBI Head of Economic Analysis, said.

"Sentiment regarding business conditions has also fallen back, particularly for exports. UK companies are increasingly concerned by political and economic conditions abroad, whether it is ongoing weakness and uncertainty in the Eurozone or the approaching fiscal cliff in the US.

“Nevertheless, underlying conditions seem relatively stable in this survey. Employment has continued to rise, investment intentions remain reasonably healthy, and expectations for output and orders have held up.”

Stocks of finished goods rose in the past three months (+10%) for the third quarter in a row, ahead of expectations that they would be flat (0%). They are expected to fall in the next quarter (-7%).

Average unit cost growth rebounded this quarter (+20%), following last quarter’s eight-year low (0%). Growth in unit costs is expected to moderate somewhat in the next three months (+11%).

Despite the solid rise in costs, manufacturers’ export prices fell (-11%) in line with their long-run average rate (-9%), while domestic prices were broadly flat (-3%), suggesting a renewed squeeze on margins. In the coming three months, firms expect domestic price inflation to pick up (+7%), while export prices are expected to continue to edge down (-6%).

Elsewhere, spare capacity increased a little over the past three months, with 57% of manufacturers working below capacity compared to 52% in July. Furthermore, expanding capacity has fallen back as a motivation for investment in the year ahead (cited by 35% of respondents, compared to 42% in July), with firms increasingly looking to improve the efficiency of their operations (64%), and replace equipment (52%).

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