CBI finds manufacturers’ concerns about inflation at highest levels in six years despite total orders hitting two-year high

This article is more than 3 years old

This article is more than 3 years old

Britain’s manufacturers fear the rising cost of raw materials will soon dent a robust recovery since the Brexit vote that has included total orders hitting a two-year high.

A survey of the sector found suggested that concerns over inflation were at their highest level for six years as firms said the weak pound was increasing the cost of imports, forcing them to raise prices or accept a severe squeeze on profits.

Export orders also fell slightly, though remained well above the long-run average as manufacturers continued to benefit from the flipside of the devaluation in sterling.

The CBI, which conducted the survey, said stronger demand and higher production showed the manufacturing industry remained in rude health.

But it warned the chancellor, Philip Hammond, that the government would need to step in to alleviate rising cost pressures to prevent a reversal of fortunes.

Rain Newton-Smith, the CBI’s chief economist, said: “With cost pressures building, businesses will be looking to the budget for relief from business rates, specifically bringing forward the adjustment from retail prices index (RPI) to the consumer prices index (CPI).

“Over the longer term, investment in education and innovation as part of the government’s industrial strategy will really need to deliver in the face of increasing political headwinds.”

Hammond will unveil his first budget on 8 March with businesses becoming increasingly concerned about rising business rates and the uncertainty surrounding Britain’s relationship with the European Union.

He is expected to resist calls for him to intervene to lower business costs while industry remains buoyant and employment is at an all-time high.

Ruth Gregory, UK economist at Capital Economics, said the CBI’s industrial trends survey added to the evidence that the manufacturing sector was getting back on its feet.

The headline total orders balance picked up from +5 in January to +8 in February, its highest level since February 2015 and well above its long-run average of -19, while the export orders balance fell from -9 to -10 in February to remain well above its long-run average of -20.

Gregory said: “Admittedly, the drop in the pound is having a clear impact on price pressures, with the price expectations balance rising to its highest in nearly six years.

“But the sector looks on course to provide a positive contribution to GDP growth in the first quarter. And with manufacturing exports set to benefit from the fall in sterling and solid demand from abroad, the future looks more promising for manufacturing activity than it has done for some time.”

Samuel Tombs, chief economist at Pantheon Macroeconomics, was more gloomy, arguing that manufacturers were failing to capitalise fully on the lower pound and relying on domestic orders.

“It remains difficult to see how domestic demand will maintain its momentum when producers push through even bigger price rises,” he said.

“The percentage of producers reporting that they will raise prices over the next three months rose to +32 in February – its highest level since April 2011. The balance is consistent with producer output price inflation picking up to about 6% soon, from 3.5% in January.

“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. Accordingly, we continue to expect the manufacturing revival to lose considerable pace later this year.”