Cost fears only shadow over resurgent manufacturing

SCOTLAND'S manufacturing sector continues to ride a high with firms enjoying further upturns in domestic and export orders although soaring costs are starting to bite.

Publishing its latest industrial trends survey, CBI Scotland highlighted improving trends across all main indicators during the past three months. As well as strong orders both at home and abroad, firms reported higher output and increased hiring levels.

The poll of 40 Scottish manufacturers - a higher sample than normal for the quarterly CBI survey - revealed domestic orders outpaced exports for the first time in 12 months, and recorded their strongest performance for five years.

It came as the business organisation's UK-wide industrial trends study pointed to the strongest growth for 16 years over the past three months, though there were indications that its pace may slow.

Despite accounting for less than a fifth of total output, a resurgent manufacturing sector has helped drag the British economy back from the brink of a double-dip recession.

Figures due out today are expected to show that the economy has rebounded from a shock 0.5 decline at the end of 2010.

Analysts expect the preliminary estimate of gross domestic product in the first quarter of 2011 to range from 0.2 per cent to as much as 1.2 per cent.

The findings of the Scottish CBI survey will provide encouragement for a sector that has seen its fortunes revived thanks to a weak pound and strong growth in key export markets such as Russia and China. Companies as diverse as tyre maker Michelin and cereal producer Scott's Porage Oats have recently announced plans to expand their Scottish operations.

Concerns remain, however, particularly relating to input and commodity costs - rises that are likely to feed their way through to prices on the high street.

According to CBI Scotland, average unit costs rose at their quickest pace for almost three years. Companies predicted further hikes during the summer albeit at a slower rate than in the previous quarter.

The report noted that confidence over the general business situation remained "broadly flat" although optimism over exports for the year ahead had improved.

Iain McMillan, director of CBI Scotland, said: "This solid set of results suggests that the revival in Scottish manufacturing witnessed of late is becoming more entrenched, despite the recent spike in input costs.

"This will be crucial if Scotland is to strike a more sustainable economic model, becoming less reliant on public spending and with a far greater emphasis on private sector growth."The survey, conducted between 23 March and 11 April, spanned a range of sectors including textiles, chemicals, food and drink, mechanical, instrument, electrical and vehicle engineering.

Across the UK, a balance of minus 11 per cent of companies said order books were higher than normal in April, compared with a positive reading of 5 per cent in the previous report, casting doubt as to whether they can continue to provide the same level of support to Britain's economic recovery.

Companies also warned they have increased their prices at the fastest rate since 1995 as they pass on higher costs, chiefly due to the soaring cost of oil.

Howard Archer, chief UK economist at IHS Global Insight, said: "While still decent compared to long-term norms, the April CBI industrial survey adds to recent mounting signs that the hitherto buoyant manufacturing sector may be gradually coming off the boil.

"The concern is that manufacturers will find life increasingly challenging over the coming months as stock rebuilding wanes and tighter fiscal policy weighs down on domestic demand.

Keeping the flag flying for Scotland's manufacturing sector

Scotland's manufacturing base may have shrunk since the boom years of the mid-20th century, but the country can still boast its fair share of success stories from a diverse range of sectors:

Alexander Dennis, the Falkirk-based bus manufacturer, is working its way through a 100 million order book after winning recent contracts for 500 vehicles from a string of transport companies. There is increasing interest in its hybrid-electric technology from both home and abroad.

Aggreko, one of Scotland's biggest PLCs, has seen strong worldwide demand for its temporary power generators and refrigeration units. Its new Dunbartonshire facility employs hundreds of staff making equipment that is deployed as far afield as South America and China.

French tyre giant Michelin is eyeing a multi-million pound investment in its Dundee plant in a move that should safeguard 750 jobs and create 140 more. It is looking at plans to install "state-of-the-art production machinery" to manufacture the latest generation of environmentally-friendly car tyres. US-owned cereal producer Scott's Porage Oats plans to spend 8.5m expanding its plant near Cupar in Fife. Production is set to increase by 30 per cent with more jobs being created.

Linn Products, the Scottish hi-fi manufacturer whose products are among the most highly ranked in the world, has seen business recover since a 2006 restructuring that saw its workforce almost cut in half. The Glasgow-based firm is now at the vanguard of high-definition digital streaming technology.