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Manufacturers pessimistic as prices rise

13 August 2008

Manufacturers have continued to raise the prices of their goods, in the face of the fiercest cost increases since 1980, a CBI survey shows.
The latest Industrial Trends survey reveals that persistently high costs coupled with firms' expectations of slowing demand have led to a widespread drop in business confidence.

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 while export prices have also gone up at an accelerated rate. 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.

Levels of activity in the last three months held up reasonably well, however, with firms reporting manufacturing output as flat. While domestic orders fell markedly again for manufacturer, export orders held up well and were broadly stable.

Investment intentions have weakened. Plans for plant and machinery investment continue to deteriorate, they are well below the long-run average.

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.

Ian McCafferty, the CBI’s Chief Economic Adviser, 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, Ian 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."

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