Fresh blow to recovery hopes as manufacturing output falls

Scottish manufacturers are bracing themselves for one of their toughest years ever after output fell in the last three months, despite a further rise in export orders, a key survey yesterday revealed.

CBI Scotland's latest industrial trends report showed that both output growth and new domestic orders turned negative in the three months to July.

Exports provided the only bright spot as they grew for the sixth consecutive quarter, but the survey also revealed declining optimism and firms reining in investment. It came amid fresh fears that UK manufacturing could move into recession during the summer.

Iain McMillan, director of CBI Scotland, said the survey results - published the day after news that the UK economy grew by just 0.2 per cent in the second quarter - were "disappointing".

"Although exports are still performing well, the outlook for the next 12 months has turned negative," he said.

"Taking the results of this survey into the picture, together with Tuesday's UK second- quarter GDP figures and other data, it's clear that the underlying economic recovery remains fragile and challenging."

He called on the UK and Scottish governments to give "top priority" to delivering policies to assist investment and trade and support manufacturers.

The survey also showed prospects for business investment in the year ahead have fallen, although they remain positive for product and process innovation. But Scottish firms plan to cut spending on buildings, plant and machinery, and training.

The survey contrasts with the last poll, in April, which showed Scotland's manufacturing sector enjoying improving trends across all main indicators during the preceding three months. During the first quarter of 2011, domestic orders recorded their strongest performance for five years.

Meanwhile, a UK-wide survey from the CBI yesterday showed optimism among manufacturers had fallen for the first time in two years, although new orders remained in positive territory, unlike in Scotland.

A balance of 8 per cent of manufacturers saw new orders increase in the three months to July, an easing in the pace of growth seen in the previous five quarters, the CBI said.

But UK manufacturers said they were less optimistic than three months ago - the first drop in sentiment since July 2009.

Economists said the survey, which polled 445 businesses, indicated UK manufacturing had shifted down a gear and raised fears it could move into recession during the summer.

The CBI's chief economic adviser, Ian McCafferty, said the manufacturing slowdown was expected to persist into the third quarter. "Manufacturers are now reappraising their business plans, with firms expecting to lower recruitment in the coming quarter and invest less in the year ahead," he noted."How far the slowdown will be borne out is yet unclear, but the combination of political and economic uncertainty is sapping confidence."

The CBI survey also showed that a balance of 10 per cent of manufacturers expect to cut employment over the next three months, heightening concern that the private sector will not be able to compensate for increasing job losses in the public sector.

Howard Archer, chief UK and European economist at IHS Global Insight, said: "The CBI survey is markedly weaker across the board showing softening domestic and export order books, rising stock levels, lower production expectations, plans to cut employment and reduced investment plans - not a happy combination for third-quarter growth prospects."