Price fears as Britain’s manufacturing expands

Aboom in domestic demand has driven optimism among British manufacturers to increase at its fastest pace for two years, according to a survey of UK businesses. More than a quarter of manufacturing firms are optimistic for prospects for the year ahead, according to the Confederation of British Industry (CBI), outweighing negatives by the most since 2015.

Domestic demand helped to drive the improvement in morale, with the volume of UK orders rising at it fastest rate since July 2014 in the three months to January.

Meanwhile, the devaluation of sterling has boosted exporters. Manufacturers report export prices rising at an average of 16 per cent, well above the long-run trend of a nine per cent average decline. The survey found export and export prices were expected to rise further.

While manufacturers are expanding output at a steady pace as the economy continues to grow into the year, there are some warning signs, however, as the cost of inputs used by factories shot up at the fastest pace in the survey’s 25-year history, indicating that the weak pound is pushing up the price of imported goods and raw materials.

It is likely that some of this will be passed on to customers, with manufacturers and retailers along the supply chain being forced to work out whether to accept a squeeze on profit margins or hike prices for shoppers and business customers.

As well as rising import prices, “we are also seeing more companies reporting domestic supplier price hikes resulting from the rising cost of commodities such as fuel, oil, plastics and steel,” said Rob Dobson, senior economist at IHS Markit.

Dobson also said: “With cost pressures increasingly feeding through to higher selling prices at factories, it looks inevitable that consumer price inflation will rise further in coming months. The question is whether increased cost inflationary pressure will act as a drag on manufacturing growth.”

The accountants’ optimism index, which indicates how firms expect their order books to develop in the next six months, has risen to 103.7 from 102.2 at the end of last year.

BDO’s latest report also found that Britain’s manufacturing confidence is at a 20-month high. However, sterling’s devaluation could contribute to rising inflation, BDO warned. Its inflation index has increased to 104.5 from 103.8 and the upward trend is expected to continue.

“While currency depreciation makes British exports more price competitive, firms’ input prices have risen sharply,” said BDO’s report.

A partner at this firm, Peter Hemington, said: “The UK economy seems to be remarkably resilient. British businesses are surprisingly confident about the short-term, encouraged by the opportunities our cheaper currency and a better-performing global economy have created. These have provided a much-needed short-term boost for our economy, particularly manufacturing.”

Head of retail group JML, John Mills believes that the UK can become a competitive manufacturing centre if sterling falls substantially for a sustained period of time.

The pound fell from $1.48 just before the EU referendum and is hovering around $1.25 these days. But a further fall, as may well happen when Brexit is triggered, could help the UK reach a tipping point at which the country can compete even with the likes of China, he said.

“If the exchange rate came down to around $1.05 it would become more economical to site manufacturing in the UK rather than shipping goods in from China,” Mills said. Adding: “We need to get the exchange rate to that level to make it worth producing the vast range of goods you see in the shops.”

Meanwhile, a separate study by the Institute of Chartered Accountants in England and Wales (ICAEW) revealed that confidence for the current quarter is still in negative territory at minus 8.7, compared to minus 9.8 in the last quarter of 2016 with output picking up strongly in the final month following falls in the previous two months which caused an overall fall of 0.9 per cent in the third quarter. It brought about some of the biggest job losses across the UK economy at the time.

ICAEW’s index found that the retail and property sectors saw the largest decline in confidence this quarter following a difficult festive period in December.

However, the group pointed out that companies forecast stronger growth in both domestic and export sales than in recent quarters.