Back in October 2008, The Confederation of British Industry (CBI) predicted that the recession would be deeper and longer than initially feared. Three months on, its latest quarterly Industrial Trends Survey fully supports these fears. With news outlets across the globe reporting sky-rocketing levels of unemployment (the latest tally here in the UK reaching the 1.92 million mark), it should come as no great surprise that manufacturing industry has been hit hard. DPA's Simon Rowley was invited to the CBI’s HQ in London to find out more. Here is his report:
Ian McCafferty, the CBI’s Chief Economic Adviser, was on hand to present the confederation’s findings, and didn’t waste time in delivering the clear message: there has been a rapid deterioration in trading in the UK manufacturing sector, with a sharp drop in demand for products over the last three months. In fact, 56% of the companies surveyed reported a fall in the volume of new orders compared with the previous quarter; whereas only 14% reported a rise, giving a balance of –43 – the lowest in more than 17 years. Rather worrying, prospects for the next quarter appear even more negative.
“The survey shows that manufacturing in Britain, as elsewhere, is being hit hard by the economic downturn. Demand for goods in the manufacturing sector has plummeted dramatically in the last three months”, comments McCafferty. “Sentiment and the outlook for the next three months are also very negative. Most firms expect conditions to get even worse, with further falls in orders expected, leading to more job cuts. Companies unsurprisingly plan to cut back investment sharply over the next year”, he continues.
In the mechanical engineering industry specifically, optimism fell at a record rate, while output declined at its fastest pace since the second quarter of 1999, and looks set to fall faster next quarter. The trend in total new orders worsened, with a decline at the fastest rate in just over ten years and a similar decline foreseen next quarter. Average unit costs continue to rise, albeit at a gradually decelerating pace, but prices have started to decline, so continuing the familiar cost-price squeeze. This is expected to continue next quarter. Numbers employed fell at a faster rate and are predicted to fall faster still next quarter. Investment intentions have consequently weakened, and are the lowest since at least 1978.
Here are the survey findings, in more detail:
The survey shows that 70% of companies are less optimistic than three months ago, while just 6% are more positive, giving a negative balance of -64, the lowest in more than 28 years.
The further sharp fall in demand over the last three months has had a series of negative consequences for the manufacturing sector. Employment fell sharply, with 45% of companies saying that they employed fewer people than in the previous three months, while just 7% said they employed more, giving a balance of -38. This compares with a balance of -15 the previous quarter, and is the lowest in more than nine years. Furthermore, 70% of companies said they were working below capacity, up from 62% in October. Firms also have more stocks of unsold goods than is deemed adequate to meet demand, with a balance of +27 reporting this - the highest since January 1981.
Export orders fell despite the fall in Sterling against other leading currencies during the last quarter. 38% of firms reported a fall in export orders, compared with 14 reporting a rise, to give a rounded balance of -25, the lowest in seven years. Manufacturers expect export orders to be even lower in the current quarter, with a balance of -27 expecting them to be down on last quarter.
Prices in the sector have been cut for the first time in three years. 24% of firms reported lower domestic prices in the last quarter compared with the previous quarter, with 16% reporting a rise, to give a balance of -8.
Looking forward to the next three months, firms forecast even weaker demand, with 62% saying the volume of new orders would be lower than last quarter, while just 8% said they would be higher, giving a balance of -54, the lowest since the survey began in 1958.
Firms also expect output to fall more sharply over the next three months. 50% of companies said they expected it to be lower in this quarter than in the previous quarter, compared with 7% expecting a rise, giving a balance of -43, the lowest since records began in 1975. Based on the survey findings, the CBI forecast that official manufacturing output will fall by 4.5% in the first quarter of 2009.
Companies also expect numbers employed to decrease more rapidly over the next three months. 53% of firms said they expected staff numbers to be lower in this quarter than in the previous quarter, compared with 3% expecting a rise, to give a rounded balance of -49, the lowest since April 1981. They forecast that 48,000 manufacturing jobs were lost in the fourth quarter of 2008, and a further 60,000 will be lost in the first quarter of 2009.
The most significant constraint on output over the next three months will still be demand, with 85% citing orders and sales. However, access to credit and finance was also a significant issue, with 17% citing it, up from 9% the previous quarter.
Investment is being hard hit by the downturn. Manufacturers expect to spend less on investment over the next 12 months compared with the previous period. For product and process innovation the balance was -30, and for training and retraining the figure was -25. For capital expenditure on buildings it was -56, and for plant and machinery it was -57, the lowest since the survey began in 1958.