Demand for UK-manufactured goods rises to two-year high

Fall in value of pound may be encouraging firms to source materials domestically

Demand for UK-manufactured goods has risen to a two-year high, but the fall in the value of the pound is expected to drive up prices in the coming months, according to the latest survey of the UK manufacturing sector by the Confederation of British Industry.

The survey of 471 firms, published on Monday, found that total manufacturing orders reached a two-year high in the three months to February.

Export orders were unchanged, but remained above their long-run average. Economists say the fall in the value of the pound following the EU referendum may be leading UK businesses to source more of their inputs from domestic producers.

Monday’s survey is the latest to find evidence of a shift in the UK economy away from the services sector and towards manufacturing. Official data published last week found that retail sales slowed in January as higher costs started to be passed on to consumers.

Growing strongly

Other surveys, including the purchasing managers’ indices produced by Markit/CIPS and the Bank of England, have also reported that manufacturing is growing strongly.

However, the services sector accounts for about 80 per cent of the UK economy, while manufacturing only makes up 10 per cent, so modest growth in manufacturing is unlikely to offset a slowdown in services.

While output continued to climb in February, the CBI survey also found that companies expect prices to rise sharply in the coming months.

A higher proportion of manufacturers said they expected the price of their goods to increase than at any time since April 2011, when consumer inflation was running at 4.5 per cent, the CBI said on Monday.

“Stronger demand and production is good news for UK manufacturers, though the weaker pound continues to push up input costs,” said Rain Newton-Smith, CBI chief economist.

Higher costs

As much of the raw material used to make goods in the UK is imported, the fall in the exchange rate is set to lead to higher costs for businesses.

Official data from the Office for National Statistics published last week found that the price of imported materials and fuels had increased 20 per cent over the past year, partly driven by a recovery in global commodity prices, as well as by currency movements.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said that as manufacturers raise their prices, the sector will lose momentum.

“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,” he said.

However, Ruth Gregory of Capital Economics disagreed, saying: “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.”

– (Copyright The Financial Times Limited 2017)