Manufacturers in the United Kingdom have continued to raise the prices of their goods, in the face of the fiercest cost increases since 1980, a Confederation of British Industry survey released on July 23 shows.
The latest Industrial Trends survey, which celebrates its 50th anniversary this week, reveals that persistently high costs coupled with firms' expectations of slowing demand have led to a widespread drop in business confidence.
In the last three months, average unit costs rose for 65 percent of manufacturers while they fell for just 7 percent. The resulting balance of +58, the highest since October 1980 (+58), comes on the back of soaring oil prices, up by more than a third in the last quarter alone. Firms expect costs to increase at a similar rate in the next three months.
As a result, firms have attempted to offset some of the damage to their profit margins by raising prices. For two quarters in a row, domestic prices have risen markedly (a balance of +21 recorded in April and +27 this survey period) while export prices have also gone up at an accelerated rate (+12 and +19). This quarter’s figures are the highest since April 1995, and firms expect prices to increase over the next three months at the highest rate since January 1990 for domestic prices, and January 1995 for export prices.
Firms’ mood about the business situation darkened considerably for the fourth quarter in a row, but this time sentiment has taken an even greater dive – the balance of -40 is the weakest since October 2001 (-54).
Levels of activity in the last three months held up reasonably well, however, with firms reporting manufacturing output as flat (-1), much as expected (0). While domestic orders fell markedly again for manufacturers (-19), export orders held up well and were broadly stable (-2).
In the monthly question asked about manufacturers’ total order book levels, a balance of 8 percent of firms considered they were below normal in July – a return to the negative perceptions recorded in April and May but still considerably above the long term average (-15).
However, expectations for manufacturing activity are less positive for the coming quarter, with the weakest balances for expected output (-7), domestic orders (-21) and export orders (-8) recorded for at least five years.
There was a surprise let-up in the pace of job shedding over the last three months, with the slowest rate of job losses (-7) since October 2004 (-4). Firms’ expectations for the coming quarter are much more negative, however, with a balance of 27 percent expecting to cut jobs. Based on the survey results, the CBI forecasts that 10,000 jobs were lost in the second quarter of 2008 and 26,000 will go in the third quarter.
Investment intentions have weakened since the last survey. Plans for plant and machinery investment continue to deteriorate, they are well below the long-run average, with -24 the weakest balance since October 2002 (-25).
However, despite more difficult lending conditions brought on by the credit squeeze, manufacturers are reporting that any constraints they may be facing in terms of cost of, or access to, external finance are not hampering their investment plans.
With the slowing in the global economy already underway, firms are more worried that uncertainty over demand will be a constraint to investment (55 percent is the highest percentage of firms since January 2006).
Ian McCafferty, the CBI’s chief economic advisor, said: "Cost pressures on manufacturers have been noticeable for over four years but in the last three months they have been their most intense for nearly three decades. So, it comes as little surprise that manufacturers are passing some of these higher costs onto customers, although this is unlikely to rescue profits from a margin squeeze. The record oil price peaks in the last three months have pushed down further on business confidence and lowered firms' expectations for demand in the coming quarter. Even exports, which so far have helped bolster manufacturers' order books, are expected to soften despite the boost to competitiveness from weaker sterling."
Commenting on the 50th anniversary of the Industrial Trends survey, McCafferty said: "Few data series can run 50 years and still be valid and valued. As the earliest indicator of manufacturing activity, the CBI's Industrial Trends survey is closely watched by the Bank, the Treasury and commentators alike, and plays a key role in economic decision-making."
