Higher interest rate impact felt

Published:  18 September, 2007

Demand for manufactured goods remains high, but firms' expectations for output growth are noticeably weaker than they were in the first half of 2007, according to the CBI's August Industrial Trends Survey.

After five months of strong expectations for increasing output, the balance of manufacturers forecasting growth dipped to +10% in July and has now been followed by an only slightly more upbeat balance of +13% in August. The figures contrast with the average balance from February to June of +22%.

However, demand remained strong in August, with an increased balance of +9% of firms reporting their order books were above normal. Statistically this is the highest balance since 1995 (just above June's balance of +8%) but there are marked differences between the manufacturing sectors.

Firms producing capital goods, such as industrial machinery, engines and agricultural equipment, said business was brisk (a very strong balance of +30% reported 'above normal' order books). Consumer goods producers enjoyed a return to healthy order book levels, from July's balance of -9% to +8% in August. However, manufacturers of intermediate goods, including components, parts and building materials, suffered a deterioration in demand, with last month's balance of -3% taking a further knock to -11%.

Across the manufacturing sector, export demand remains healthy, with order book levels considered broadly 'normal'. The balance of -3% is still significantly above its long term average (-22%). Additionally, after a dip in June, stocks have now recovered to a more than adequate level.

Since the 12-year high in May (a balance of +25%), manufacturers' confidence in their ability to raise prices has fallen, but the balance of +16% is still elevated relative to the past decade.

Lai Wah Co, CBI principal economist, said: "Manufacturers are being kept busy, and their order books are still healthy, but they foresee weaker output growth for the rest of the year.

"While price pressures in the manufacturing sector have not gone away, the Bank of England can take some comfort from the expected slowdown in output growth as recent monetary policy appears to be having its desired impact.

"With the recent turmoil in world stock markets and the risk of spillover into economic activity, the Bank should continue to hold steady on interest rates."

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