By Max Clarke

Britain’s manufacturing recovery is firmly on track and looks set to continue, the CBI (Confederation of British Industry) said today.

Strong domestic and export orders growth has boosted factory output. But inflationary pressures continue to intensify as companies pass on the burgeoning cost of raw materials by raising the price of goods at the factory gate, according to the UK’s leading business group.

Of the 451 manufacturers that responded to the April Quarterly Industrial Trends Survey, 36% said they had seen an increase in output in the last three months, while 15% said it had fallen, giving a rounded balance of +20%. This was driven by strong growth in both domestic (+15%) and export (+24%) orders, with the rates of growth at their fastest since April 1995 (+17% and +34% respectively).

The CBI’s research reflects the surge in UK exports experienced by British businesses reported in a recent report carried out by business exporters, DHL Express and verified by the Office for National Statistics.

Demand and production are expected to continue rising over the next three months. Companies predict that output growth will be sustained at a similar pace to this quarter (+22%). At the same time, manufacturers expect domestic and export orders to continue to increase over the next quarter (+11% for both), at rates well above their long-run averages.

Output has also been boosted by rapid restocking over the past quarter. Companies have built up inventories of raw materials (+13%), work in progress (+10%) and finished goods (+17%) to the greatest degree since July 1979 (+13%), January 1995 (+10%) and July 1977 (+19%) respectively.

In line with the ongoing recovery in the sector, manufacturers took on more staff for the third quarter running. The net number of companies saying that they had added to their workforces in the last three months (+15%) was the highest since January 1974 (+21%). The outlook for employment over the next quarter is also positive, with a balance of +7% of firms expecting to recruit.

But alongside robust growth in activity, companies’ production costs have risen rapidly during the last quarter. A balance of +53% said average unit costs had gone up, the highest since October 2008 (+56%), and a further acceleration on significant cost rises already experienced over the past year. As a result, manufacturers have driven up domestic and export prices rapidly (+29% and +30%), with the rates of inflation the strongest since April 1995 (+29%) and April 1985 (+34%) respectively.

Inflationary pressures show no sign of receding over the coming quarter, with firms expecting costs and prices to increase sharply again over the next three months (a balance of +43% for average unit costs, +36% for domestic prices, and +25% for export prices).

“The manufacturing recovery remains firmly on track,” commented John Cridland, CBI Director-General. “Strong demand at home and abroad and rapid restocking over the past quarter have led to another solid rise in production, with growth expected to continue over the next quarter.

“It is also good news that manufacturers are continuing to take on more staff to handle the increased workload,” continued Cridland. “But production costs have jumped markedly during the last three months, rocketing ahead after a full year of already rapid cost inflation. This is unsurprising given the recent surge in oil and other commodity prices.”

Manufacturers have also reported a further tightening in capacity pressures. 29% of firms expect plant capacity to be a likely constraint to output over the next three months, the highest since October 1988 (29%). As a result 46% of companies plan to invest to expand their capacity during the next twelve months, a survey high (October 1979).

Investment intentions on the whole remain strong. In particular, firms plan to spend more on plant and machinery (+7%) and product and process innovation (+28%) during the coming year relative to the previous twelve months.

Monthly data from the survey showed 21% of manufacturers said that total order books were above normal, while 31% said that they were below. The resulting rounded balance of -11% is down on March (+5%), but is still above the long-term average. Overseas demand in April remains well above the average also, a balance of -6% on export order books, albeit weaker than in March (+5%).

Lai Wah Co, CBI Head of Economic Analysis, said:
“Perceptions of order book levels have dipped in the monthly data, but the readings are still well above the long-run average. The quarterly questions show that manufacturing orders have risen strongly over the past three months and output growth remains robust.”