By Max Clarke

For the first time in two years, optimism regarding the general business situation fell among UK manufacturers, and expectations of slower activity are driving a reappraisal of forward-looking business plans, the CBI said today.

Growth in total orders and production eased slightly in the three months to July and manufacturers expect a further deceleration over the next quarter. As a result, after a fourth successive increase in employment in this survey, they plan to cut headcount over the next three months and have revised down their investment plans for the year ahead.

“Orders and output growth in the manufacturing sector slowed slightly over the past quarter,” said Ian McCafferty, the CBI’s economic advisor. “This is in line with a broader slowing in production globally, with supply chains around the world impacted by the Japanese tsunami earlier this year. Sentiment has also been affected by concerns over the Eurozone crisis, and the squabbling over the US debt ceiling. “

Responding to the July Quarterly Industrial Trends Survey, manufacturers reported that they were less optimistic than three months ago (-16%), the first fall in sentiment since July 2009.

Over the past three months, manufacturers recorded a slight easing in activity relative to the strong growth of recent surveys. Of the 445 respondents, 32% said they saw an increase in the total volume of new orders, and 24% said they had fallen. The resulting balance of +8% represents a slight easing in the pace of growth relative to the previous five quarters.

Nevertheless, factory output continued to grow at a pace above the long-run average in the three months to July, with a balance of +11% of manufacturers reporting an increase. However, this was again slower than the strong expansion over the past year.

Over the next three months, a more marked easing in activity is anticipated, with orders expected to be unchanged (balance of 0%), and production expected to rise more modestly (+6%).

As a result, manufacturers are reappraising their business plans. After a fourth successive quarter of growth in employment, they plan to reduce headcount over the next three months (-10%). Investment intentions for the year ahead have also weakened. In particular, manufacturers are planning to spend less on plant and machinery (-17%) relative to the past twelve months, with plans for capital spending now below their long-run average for the first time since July 2009.

Fewer firms plan to invest in the year ahead to expand capacity, with more firms instead planning to replace existing capital and increase efficiency. In a further sign of easing capacity pressures, this has also fallen back as a constraint to output over the next three months (now cited by 20% of firms).

McCafferty continues:

“However, this slowdown is expected to persist into the third quarter. Consequently, manufacturers are now reappraising their business plans, with firms expecting to lower recruitment in the coming quarter and invest less in the year ahead. How far the slowdown will be borne out is yet unclear, but the combination of political and economic uncertainty is sapping confidence.”

Alongside some deceleration in activity this quarter, cost and price inflation also moderated. Domestic and export price inflation slowed (+18% and +11%) from sharp spikes in April, and growth in unit costs also fell back (+34%).
A further easing in both is expected in the next three months. Output prices in particular are expected to rise only marginally (+4% for both domestic and export prices), with costs inflation set to be relatively more elevated (+23%).

Elsewhere, monthly data from the survey showed 19% of manufacturers said that total order books were above normal, while 29% said that they were below. The resulting rounded balance of -10% is now broadly similar to that in April (-11) and still above the long-run average. Export order books (-8%) also remain well above their long-run average.

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