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Gloom sets in as orders drop and costs spiral

01 January, 2005

Gloom sets in as orders drop and costs spiral

Manufacturing orders in the UK have fallen for the first time in 15 months, according to the latest quarterly industrial trends survey published by the Confederation for British Industry.

Export orders and employment fell at the fastest rate for 15 months, while the high prices of oil, metal and other raw materials sent manufacturing costs zooming upwards at a rate not seen for nine years.

The unexpectedly poor results of the past quarter have also caused the sector`s confidence to deteriorate at the fastest rate for almost two years.

"Firms have experienced a disappointing three months," reports Ian McCafferty, the CBI`s chief economic advisor. "Manufacturing demand has weakened at home and abroad, with exports hampered by the recent weakening of the dollar. Companies expect little by way of significant improvement in the months ahead.

He adds that firms can only pass on a fraction of their rising costs by raising prices, so their profit margins are coming under intense pressure.

Of the 736 manufacturers surveyed during the month to 12 January, 31% reported that orders had fallen over the previous quarter, while 27% reported a rise. The balance of -4% marks the first fall in orders since October 2003, and compares with +4% in the previous survey.

Export orders fell over the past three months, despite expectations of an increase. Some 29% of firms saw export orders fall, while 21% saw them rise. The balance of -8% compares with a flat result in the previous survey.

Looking ahead, firms expect the slide in orders to end during the coming quarter, with an anticipated balance of +6%. The outlook for overseas demand is less positive, with a further slight decline in export orders expected.

Costs per unit of output rose during the quarter at the fastest rate since October 1995. The balance of +23% compares with +14% in the previous survey.

During the quarter, employment fell at the fastest rate since October 2003. The balance of -16% compares with -4% in the previous survey. Further job cuts are expected over the coming quarter.

Confidence fell for the second consecutive quarter and at the fastest rate since April 2003. The balance of -22% compares with -10% in October and reverses the trend of improving optimism seen in the first half of 2004.

Output over the past three months was broadly flat, despite expectations of a reasonably strong increase. The balance of +2% is the lowest output balance for 15 months and compares with +6% in the previous survey. Companies now expect output to increase over the coming quarter.

Manufacturers plan to cut investment in buildings, plant and machinery, but to spend more on training. Uncertainty about demand and inadequate returns are the most significant factors limiting investment.

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