Rising costs hits manufacturing sector optimism

The manufacturing sector has seen business optimism fall sharply, citing rising costs and depressed growth according to the latest Quarterly Industrial Trends Survey from the CBI.

The quarterly survey, sponsored by Accenture, found that business optimism fell in April by 9%, the sharpest decline since the April 2020 survey when pandemic restrictions were first introduced in the UK.

The responses of 250 manufacturing firms to the CBI survey showed that growth in output and new orders had slowed, while selling prices and costs had both risen in line with high inflation. Prices were up 60% on the previous survey in January, while average costs grew 87%, with the cost of raw materials given by 80% respondents as ‘highly important’ in driving up costs for the sector.

Manufacturing sector respondents to the CBI survey also indicated that while output and total new orders did continue to grow, albeit at a slower rate than in January, the majority of respondents also expect a continued slowdown in the rate of growth for the sector over the coming six months. As a result, investment intentions also weakened on January data across all areas, including plant and machinery, innovation, training and buildings.

Anna Leach, 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’s 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.”

Simon Eaves, Market Unit lead, UK & Ireland at Accenture, said:

“The manufacturing sector is showing resilience in output, but the drop in optimism is concerning in the face of challenges including rising costs and the availability of materials. To maintain competitiveness businesses need to make balanced decisions for the near and long term to secure their future.

“In the short term, retaining, motivating and upskilling staff is critical as well as lowering process costs and making the supply chain as efficient as possible.  For the longer term, a twin focus on investing in digitalisation and sustainability is crucial to gain success past the current cycle.”