Optimism among UK manufacturers has fallen at its sharpest pace since the first coronavirus pandemic lockdown two years ago as firms struggle to cope with the fastest increase in their costs since 1975, according to the latest industry health check.
With the war in Ukraine giving a fresh upward twist to the pressures on companies, the April industrial trends survey from the employers’ organisation the CBI found firms cutting back on investment and planning to pass on higher costs to consumers.
Manufacturing output and order books continued to grow despite the worsening inflationary backdrop but at a slower pace than in recent months, the CBI said.
The survey showed the balance of firms whose costs increased – the number reporting a rise minus the number reporting a drop – stood at 87 percentage points in April. That was only slightly below the record of +88 points in July 1975, when UK inflation was running at more than 20%. Dearer raw materials and energy resulted in the fastest average price increases (+60 points) since 1979, with a further acceleration in price growth expected in the next three months.
The CBI said the downward trend in optimism among manufacturers had continued. A year ago, when the UK was emerging from the early 2021 lockdown, firms upbeat about the outlook outweighed those gloomy by a balance of +38 percentage points. By October that had dropped to +2 points as supply chain shortages pushed up prices. The figure now stands at -34 points.
Anna Leach, the CBI deputy chief economist, said: “Manufacturing orders and output continue to grow, albeit at slower rates. But the war in Ukraine is exacerbating the Covid-related supply crunch, with cost increases and concerns over the availability of raw materials at their highest since the mid-1970s. It is little wonder that sentiment has deteriorated sharply over the past three months and manufacturers are now scaling back their investment plans.
“The government must look again at near-term support measures to help firms through this crisis. An immediate priority should be to provide cashflow support for those struggling with wholesale energy costs via the recovery loan scheme, while cutting bills for energy intensive industries can help maintain UK competitiveness.”
Samuel Tombs, a UK economist at Pantheon Macroeconomics, said: “Given emerging evidence that demand is faltering in response to hefty price rises, manufacturers are understandably pessimistic about the outlook; the business optimism balance dropped to -34 in the second quarter from -9 in the first quarter.
“The employment and investment intentions balances also weakened in the second quarter, though they remained above their long-run averages. We think manufacturers are right to be relatively downbeat about the outlook and expect production to flatline over the rest of this year.”
