Factory growth frozen by eurozone turmoil

Business lobby group the Confederation of British Industry (CBI) said while many UK manufacturers have cash, turmoil in the eurozone has made them think twice about spending it.

The figures came as Britain’s economy planted one foot in recession, with GDP in the fourth quarter falling 0.2 per cent.

Within the Office for National Statistic figures, manufacturing fell 0.9 per cent on the quarter, its biggest drop since late 2009, dealing a blow to Chancellor George Osborne’s call for a “march of the makers”.

According to the CBI’s industrial trends survey, it was the first time quarterly manufacturing output has flatlined since April 2010. A balance of just two per cent of firms reported higher output. The weakening was exacerbated by de-stocking in the chemicals sector, added the CBI, which is highly sensitive to changes in sentiment and makes up about 14 per cent of manufacturing.

“The sovereign debt crisis in the eurozone has been the single biggest factor in that weakening of sentiment,” said CBI director general John Cridland.

“There are great uncertainties about what happens next. We know that 2012 will not be an easy year.”

Manufacturing, which in turn makes up about 12 per cent of the economy, saw the first fall in domestic and export orders for the first time in two years. A balance of -17 per cent saw a fall in domestic orders, the first since January 2010. The balance of -19 per cent saw export orders fall, the first since October 2009.

However, CBI said conditions and sentiment improved slightly as the quarter progressed into January. It said there are “tentative” signs that things could be better this quarter.

“Key factors behind this include the fact that the US recovery has been better than expected, and the impact of the credit downgrades in the Euro area has been muted,” said Mr Cridland.

The CBI’s survey showed manufacturers expect to see a marginal rise in export orders, but flat domestic orders. They also expect a modest rise in output growth.

Howard Archer, chief UK and European economist at IHS Global Insight, said the figures suggest manufacturing “will not be such a drag on the economy in the first quarter of 2012 as it was in the fourth quarter of 2011”.

“Nevertheless, manufacturers are clearly facing a very challenging environment early in 2012,” he added. “Domestic demand for manufactured goods is being pressurised by the current still serious squeeze on consumers’ purchasing power, reduced public spending and less favourable inventory developments.”

There were surprisingly positive signs around employment, with a positive balance of 11 per cent saying numbers employed in factories rose, making it the sixth quarter of rising headcount.

Firms said they plan to spend less on buildings, plant and machinery relative to a year earlier, although investment intentions have not fallen further, the CBI said.

“Companies in general are in a relatively healthy financial shape,” said the CBI’s chief economic adviser Ian McCafferty. “They have managed to keep costs under control; they are in a reasonably good position in terms of competitiveness.

“Companies are sitting on significant financial surpluses and a lot of cash – that cash is waiting to be spent. They have the opportunities to grow – what they now need to see is the confidence in order to grow.”

Capacity use was little changed, edging down only slightly on October. But fewer firms cited expanding capacity as motivation for investment. The CBI does not break down its manufacturing figures regionally, and Mr McCafferty said it is “not as simple as a north/south divide”.

“What we can see is that those companies that are internationally focused and who do a significant amount of their (work) business-to-business are on balance doing better than those who are dependent on the domestic consumer.”

Increase in input costs slows

MANUFACTURERS said input costs continued to climb in the fourth quarter, but much more slowly than the rate seen earlier in 2011.

Falling inflation will pile pressure on the Bank of England to resume its programme of asset purchases or quantitative easing (QE).

Although still well above average, inflation is expected to ease in coming months, “helping alleviate some of the recent squeeze on manufacturers’ margins,” said the CBI. Firms raised domestic prices slightly over the three months, while export prices were unchanged.

In the coming quarter, a balance of +13 per cent of firms expect domestic price inflation to pick up, while export prices are set to remain flat.

IHS Global Insight economist Howard Archer said: “We have little doubt that the Bank of England will announce at least a further £50bn of QE in February.”