Output and orders fall as Scottish manufacturers slip behind UK

SCOTTISH manufacturers are lagging behind those in the rest of the UK, with output falling north of the Border while the south enjoys a production surge.

CBI Scotland's quarterly industrial trends survey yesterday showed that, while exports orders rose for the fourth consecutive quarter, home demand fell unexpectedly.

Overall output contracted for the second quarter on the trot, leading CBI Scotland director Iain McMillan to brand the figures "disappointing".

"Optimism has cooled and orders and output have contracted over the past three months," he said.

"Whilst exports are performing well, the overall position in the last quarter of 2010 is looking bleaker than it did, with manufacturers having to work harder than ever to win new orders at home and abroad."

Raw material costs continue to rise but Scottish manufacturers were not able to pass on the extra burden to their domestic customers by raising prices.

Yet the past depreciation of sterling has helped Scots firm to raise their export prices.

By contrast, in the CBI's UK-wide report, manufacturers said they were able to pass on rises in raw material costs to customers both at home and abroad. In the UK report, the business body said "the manufacturing recovery is well on track", with output and orders growth picking up.

David Lonsdale, assistant director of CBI Scotland, said the difference in performance north and south of the Border could be because the re-stocking cycle has peaked slightly earlier in Scotland than elsewhere in the UK.

He suggested more Scottish customers were operating closer to capacity and were keeping their level of stocks higher so they didn't need to return to manufacturers for extra stock.

At a UK level, the CBI sounded a note of caution over orders, with a balance of -13 per cent of companies reporting a fall in orders in January, at the end of the three-months covered by the latest report. Chris Williamson, chief economist at Markit, said analysts couldn't read too much into the fall in orders as they will have been affected by bad weather.

He added: "Other data from the survey suggest manufacturers are fairly upbeat about their prospects for the coming year."

Both reports were based on relatively small samples, with 394 respondents UK-wide and just 26 north of the Border.That may have skewed the outcome as similar industrial snapshots and official sector data are based on much larger samples.

Howard Archer, chief UK and European economist at IHS Global Insight, said that, while the manufacturing sector was the "star performer in 2010", there were signs that it may not be able to perform quite as well during 2011.

Archer warned that if manufacturers are putting up their prices then it would add to the inflationary pressure on the Bank of England.

Official figures released on Tuesday showed that the consumer prices index (CPI) - the UK government's preferred measure of inflation - rose from 3.3 to 3.7 per cent in December, its highest level since April.

The CPI has been above the Bank of England's target of 2 per cent every month since November 2009.