Manufacturing hit by falling demand
26 January 2009
The CBI’s quarterly Industrial Trends Survey today reveals a rapid deterioration in trading in the UK manufacturing sector, with a sharp drop in demand for products over the last three months. Prospects for the next quarter appear even more negative.
Manufacturing hit by falling demand
Demand plummeted during the last three months, with 56% of companies reporting a fall in the volume of new orders compared with the previous quarter, and just 14% reporting a rise, giving a balance of -43. This balance is the lowest in more than 17 years, since July 1991.
The rate with which demand fell in the last quarter is particularly striking compared with previous quarters. In October, the balance for volume of new orders was -30, and in July it was -3.
Ian McCafferty, the CBI’s Chief Economic Adviser, said: “The survey shows that manufacturing in Britain, as elsewhere, is being hit hard by the economic downturn. Demand for goods in the manufacturing sector has plummeted dramatically in the last three months.
“Sentiment and the outlook for the next three months are also very negative. Most firms expect conditions to get even worse, with further falls in orders expected, leading to more job cuts. Companies unsurprisingly plan to cut back investment sharply over the next year.”
Sentiment was already weak in the sector, but the survey shows that 70% of companies are less optimistic than three months ago, while just 6% are more positive, giving a negative balance of -64, the lowest in more than 28 years, since July 1980.
The further sharp fall in demand over the last three months has had a series of negative consequences for the manufacturing sector. Employment fell sharply, with 45% of companies saying that they employed fewer people than in the previous three months, while just 7% said they employed more, giving a balance of -38. This compares with a balance of -15 the previous quarter, and is the lowest in more than nine years – since April 1999. Furthermore, 70% of companies said they were working below capacity, up from 62% in October. Firms also have more stocks of unsold goods than is deemed adequate to meet demand, with a balance of +27 reporting this – the highest since January 1981.
Export orders fell despite the fall in Sterling against other leading currencies during the last quarter. 38% of firms reported a fall in export orders, compared with 14 reporting a rise, to give a rounded balance of -25, the lowest in seven years, since January 2002. Manufacturers expect export orders to be even lower in the current quarter, with a balance of -27 expecting them to be down on last quarter.
Prices in the sector have been cut for the first time in three years. 24% of firms reported lower domestic prices in the last quarter compared with the previous quarter, compared with 16% reporting a rise, to give a balance of -8.
Looking forward to the next three months, firms forecast even weaker demand, with 62% saying the volume of new orders would be lower than last quarter, while just 8% said they would be higher, giving a balance of -54, the lowest since the survey began in 1958.
Firms also expect output to fall more sharply over the next three months. 50% of companies said they expected it to be lower in this quarter than in the previous quarter, compared with 7% expecting a rise, giving a balance of -43, the lowest since records began in 1975. Based on the survey findings, we forecast that official manufacturing output will fall by 4.5% in the first quarter of 2009.
Companies also expect numbers employed to decrease more rapidly over the next three months. 53% of firms said they expected staff numbers to be lower in this quarter than in the previous quarter, compared with 3% expecting a rise, to give a rounded balance of -49, the lowest since April 1981. We forecast that 48,000 manufacturing jobs were lost in the fourth quarter of 2008, and a further 60,000 will be lost in the first quarter of 2009.
The most significant constraint on output over the next three months will still be demand, with 85% citing orders and sales. However, access to credit and finance was also a significant issue, with 17% citing it, up from 9% the previous quarter.
Investment is being hard hit by the downturn. Manufacturers expect to spend less on investment over the next 12 months compared with the previous period. For product and process innovation the balance was -30, and for training and retraining the figure was -25. For capital expenditure on buildings it was -56, and for plant and machinery it was -57, the lowest since the survey began in 1958.