By Maximilian Clarke

Confidence has dropped sharply among UK manufacturers as firms anticipate a decline in output over the next three months, the Confederation of British Industry (CBI) has said.

Stretched incomes and low business confidence are eroding domestic demand, whilst exporters are struggling to boost sales due to export credit finance scarcity coupled with muted demand from European trading partners as a result of the eurozone crisis.

“Sentiment has deteriorated sharply, and firms expect sizeable falls in activity over the next three months. The quarterly fall in sentiment is the largest since the height of the recession in mid-2009, commented CBI Chief Economic Advisor, Ian McCafferty.

Of the 446 manufacturers responding to the latest Quarterly Industrial Trends Survey, 30% said that domestic orders rose in the three months to October and 25% said that they fell. The resulting balance of +5% indicates a very modest rise over the past quarter, although this was slightly better than expectations of no growth.

Manufacturing orders and output are expected to fall over the next quarter, following modest rises in domestic demand and production over the past three months. Firms are also predicting a run-down of their stock holdings.

One factor behind the disappointing export performance is the availability of export credit finance. The proportion of respondents citing this rose sharply in the latest survey (18%), to its highest since October 1968.

Firms also expect to reduce their stock holdings in the coming quarter, with finished goods stocks in particular set to be run down sharply (-14%). Monthly data from the survey showed that stocks remained high relative to adequate levels (+21% for the second consecutive month) — the survey balance is still the highest since June 2009 and above the long-run average (+14%).

In line with expectations of falling orders and stocks, manufacturers also expect output to fall over the next three months (-11%) — if realised, this would mark the first decline since October 2009. This follows another modest rise in production over the past quarter, with a balance of +10% of manufacturers reporting an increase. However, this was slower than the strong expansion seen in the first half of this year.

Alongside the expected fall in activity over the next three months, manufacturers anticipate a slight reduction in headcount (-5%). This follows another robust rise in numbers employed this quarter (a balance of +18%), the fifth consecutive increase.

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