Huge parts of Manufacturing "Standing Idle", warns CBI Survey

www.creditman.biz   Jan 22 2003 The number of manufacturers operating below capacity has risen to a 20 year high, fuelled by a relentless two-year decline in orders and output.

The CBI's Quarterly Industrial Trends survey, published today (Wednesday), also shows manufacturers' confidence dropping further as weak global demand threatens to keep the sector mired in recession.

Seventy-four per cent of firms are now working below capacity, the highest percentage recorded since January 1983. This follows two consecutive surveys where 67 per cent of companies operated under capacity.

The survey says 31 per cent of firms saw a fall in total orders in the four months to January, while 22 per cent saw a rise. The balance of minus nine per cent follows the minus 16 per cent recorded in the October survey, and marks the eighth consecutive quarter of declining demand.

Output also fell and firms no longer expect any noticeable rise in either orders or output over the next four months. This follows three consecutive quarters in which expectations for rising demand and production were disappointed.

Conditions in overseas markets have continued to deteriorate. Export orders fell at the fastest rate for a year while the decline in export prices accelerated to the fastest rate since July 2000. As a result, export optimism for the year ahead fell for the second consecutive quarter.

Overall optimism also fell, with 30 per cent of firms less optimistic about the business situation than four months ago, and eleven per cent more optimistic. The balance of minus 19 per cent matches the figure recorded in October and compares with plus four per cent in July.

Employment fell further than expected, with no sign of respite over the next four months. The CBI predicts 42,000 manufacturing job losses in the first quarter of 2003.

Firms plan to cut investment in buildings, plant and machinery at a significant rate over the next 12 months. Projections for spending on innovation are flat, but encouragingly, plans for training expenditure are holding up surprisingly well.

The employer's organisation chose not to call for an immediate cut in interest rates because of the uncertain effects of housing market developments and the government's tax-and-spending policy on inflation. But it urged the Bank of England to remain vigilant and act swiftly if the economy deteriorates further.

Ian McCafferty, CBI Chief Economist, said: "Large sections of UK factories are standing idle. Figures show the number of manufacturers working below capacity has risen to a 20-year high, causing firms to plan further cuts in investment and jobs. With little let-up in the two-year decline in orders and output, the overall picture will concern manufacturers.

"External demand shows no sign of a pick-up and the German economy is worsening. Rising oil prices have been exacerbated by problems in Venezuela and uncertainties in the Middle East. April's rise in National Insurance contributions will be a blow to firms that are already under the cosh. This promises to be another challenging year for manufacturers."

Prices fell further than expected last quarter for the third consecutive survey, and firms expect a further, albeit more modest, decline next quarter. Manufacturers have now been subject to serious price deflation for four years.