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Manufacturing orders `are highest for 9 years` - but output drops
Published:  01 August, 2004

Manufacturing orders `are highest for 9 years` - but output drops

An inconsistent picture of the state of the UK manufacturing sector emerges from the latest statistics and surveys. According to the most recent survey from EEF, the manufacturers` organisation, Britain`s manufacturers enjoyed their best order intake for nine years in the last quarter.

But, according to the Office for National Statistics (ONS), the output of the manufacturing sector fell by 0.2% between June and July. This followed a drop in the previous month - the first back-to-back decline for almost two years.

The ONS attributes this decline largely to an 11.1% drop in beer production following the Euro 2004 football tournament, and an 8.3% fall in pharmaceutical output.

Over the past three months, Britain`s manufacturing output was 0.9% higher than the previous quarter, with the machinery and equipment sectors recording a growth of 4.3%. During this period, the electrical and optical equipment industries increased their output by 4.4% while the transport equipment industries grew by 4.1%. However, output in the paper and printing sector fell by 2.3%. Output across the manufacturing sector as a whole was 1.8% higher in the past quarter than for the same period a year ago.

The EEF survey, published with RSM Robson Rhodes, notes that manufacturing investment levels have picked up and are expected to increase further over the coming year. It shows ouput and orders rising for the fifth consecutive quarter (see figure above, which depicts the percentage balance of change). The proportion of companies reporting an increase in employment was also positive for the first time since early 1998.

But the recovery in profits is being held back by a wide range of increasing costs - notably, oil, energy and raw materials -- which continue to depress margins.

"Manufacturing remains in good health and there are no signs yet of rising oil prices or weakness elsewhere in the world derailing the recovery," says the EEF`s chief economist, Steve Radley. "However, with rising costs eating into profit margins and evidence of slowdown in the housing market, now is a good time to pause for breath on interest rates."

The EEF survey shows that:

• Output and order balances have strengthened;

• Domestic orders are catching up with export orders;

• For the second consecutive quarter, all sectors saw an increase in output, with growth in motor vehicles and other transport equipment especially strong. Electronics and electrical equipment reported the weakest conditions, after both recording strong growth in the second quarter.

The EEF expects manufacturing to grow by 1.5% in 2004 and by 2.6% in 2005, with engineering expanding by 2.9% and 4.2% respectively.

"It is welcome news that manufacturing performance is starting to show reasonable growth," says Bob Hale, chairman of RSM Robson Rhodes` National Manufacturing Group. "The much-needed pick-up in investment levels within the UK is especially vital and should help reduce the productivity and efficiency gap that exists between the UK and most of our major overseas competitors.

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