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Manufacturing stagnates as oil prices rise

01 October, 2005

Manufacturing stagnates as oil prices rise

Manufacturing orders remained well below normal during September, with increasing costs putting further pressure on manufacturers` profits, the CBI`s latest monthly Industrial Trends Survey reveals.

Demand for manufactured goods remains subdued. The survey shows that 39% of the 794 manufacturing firms surveyed were reporting order books below normal, while 12% were saying that they are above normal. September`s order books balance was only slightly up on August, when it was the lowest since October 2003.

Cost pressures have further intensified for manufacturers. Oil prices averaged almost $65 per barrel during the survey period - 58% higher than a year before - while freight costs were 33% higher than during August. According to the survey, manufacturers cannot pass these costs onto their customers, with most expecting to cut prices rather than raise them.

Export orders weakened significantly in September, falling to their lowest levels since January. Export orders had previously been holding up and had offset deteriorating demand from within the UK. The latest survey shows a sharp drop in demand from abroad for capital goods, such as machinery and equipment. A weak European export market also continues to depress orders.

"A combination of weak consumer spending and challenging world markets is weighing on UK manufacturing, following the sector`s contraction over the first half of the year," says the CBI`s chief economic adviser, Ian McCafferty. "Cost pressures from high oil and transportation prices will only serve to depress profits further.

"Although it is too early to say if this month`s decline in export demand is the start of a trend, the fall is a further blow for manufacturers at a difficult time," he adds. "Firms will be hoping this is not the first sign of a slow-down in the global economy in the face of the latest oil price increases."

Looking forward to the coming three months, 31% of the companies surveyed expect to increase their output, against 25% predicting a reduction. This small positive balance points to modest growth in production, but may be due to companies aiming to rebuild their stocks. At present, 11% of manufacturers are reporting "more than adequate" stocks of finished goods - lower than the long-term average of 14%.

The fall in average domestic prices predicted by manufacturers over the next quarter keeps expectations in negative territory for a fifth successive month, following a year of positive expectations. Only two of the ten industry groups surveyed - chemicals and metal products - expect prices to rise in their sector over the coming three months.

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