Factories hit a two-year high but prices fuel concerns

Many manufacturers expect to raise their prices over the next three months. Picture: Andrew Milligan/PA Wire
Many manufacturers expect to raise their prices over the next three months. Picture: Andrew Milligan/PA Wire
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Order books at UK factories have a hit a two-year high, but plans by many manufacturers to hoist prices to compensate for the weak pound threatens future growth, a survey has found.

The latest CBI industrial trends survey showed that total order books improved further over the three months to February to a net balance of +8 per cent, rising from +5 per cent in January and 0 per cent in December.

The weaker pound continues to push up input costs

Rain Newton-Smith

The jump was led by demand in the mechanical engineering and metal production sectors, leading to the highest positive balance since February 2015.

But the poll – which surveyed 461 businesses – also found that 38 per cent of companies expect to raise output prices over the next three months, while only 6 per cent expect to cut prices, leading to a balance of -32 per cent.

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That is the highest forecast for price hikes in the manufacturing sector since April 2011, when the balance was -36 per cent.

Manufacturers are looking to compensate for the drop in the pound, which has fallen more than 17 per cent against the US dollar and 10 per cent against the euro since the EU referendum last June.

CBI chief economist Rain Newton-Smith said: “Stronger demand and production is good news for UK manufacturers, though the weaker pound continues to push up input costs and this is now feeding through to output price inflation expectations.”

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However, businesses are still forecasting that output growth will rise over the next three months, with only 10 per cent expecting a drop in production, while 43 per cent expect a jump, leading to a balance of +33 per cent.

Howard Archer, UK economist with IHS Global Insight, described it as a largely positive survey,but warned that rising prices were a growing “fly in the ointment”.

Samuel Tombs at Pantheon Macroeconomics, said: “The manufacturing sector is growing briskly right now, but likely will falter as producers push through large price rises later this year.”

He added that the sector upturn is “worryingly dependent on domestic demand”, which is unlikely to maintain its momentum when producers pass on input price hikes later this year.

“The recent slowdown in household income growth, in response to flat employment and weakening wage growth, suggests consumers will have to cut back later this year when prices rise sharply,” Tombs said.

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