Cost increases halting manufacturing recovery, says CBI
The Confederation for British Industry (CBI) has warned that cost pressures- including rising oil prices- are hitting the recovery in the manufacturing sector.
It says that small and medium sized companies (SMEs) have seen the pace of recovery slow in the last quarter and have seen a marginal fall in orders. Business optimism though remains unchanged.
The CBI finds that average costs have risen for the eighteenth quarter in succession, and that SMEs have found it difficult to pass on higher costs through price increases.
It puts the pause in growth down to the initial impact of higher interest rates and a reduction in export orders, particularly from the US.
However, there are a number of positive signs for the sector: a rise in employment for the first time since January 1998, and a growth rate of plus five per cent – again the best since January 1998.
Hugh Morgan Williams, chair of the CBI’s SME council, said: “Although we have seen a slight pause in the recovery for smaller manufacturers, there are encouraging signs of a positive trend. Employment figures are up for the first time in six and a half years. The number of companies working below capacity has fallen to its lowest level for almost seven years.
“However, the recovery is fragile and has started from a low base after a long period of decline. There is no let up in cost pressures or in the strength of competition in the market, which both continue to squeeze margins.
“The peak in interest rates should not be much higher than the current level, and it is especially important to smaller manufacturers that the Bank of England does not apply the economic brakes too hard as the sector is more vulnerable than most.”
Interest rates have risen five times since last November and now stand at 4.75 per cent.
Oil prices have been consistently over $40 a barrel, and last night US prices reached a 21-year high of $46.85, though they have since fallen back slightly. There appears to be little prospect of an ease in prices in the short term as instability in Iraq, terrorist threats in Saudi Arabia and the tax dispute between Yukos and the Russian government continue.
