Boom Times for UK Manufacturing Help Stir Inflationary Pressures

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Orders placed with UK factories have risen to their highest level on record, while price expectations have also soared and point to ongoing inflationary pressures that are unlikely to subside soon.

The CBI's Industrial Trends Survey for November showed manufacturing order books rose to their strongest level since 1977 while export orders recovered to pre-Brexit highs.

Output growth in the three months to November increased at an above-average pace, with 12 out of 17 sectors seeing output increases.

"Demand for goods still is increasing rapidly, leaving manufacturers struggling to keep up," says Samuel Tombs, Chief U.K. Economist at Pantheon Macroeconomics.

Even accounting for seasonality, the total orders balance rose 11 points in November to reach its highest level since records begin in 1977 says Tombs.

Headline growth was driven largely by the food, drink & tobacco, electronic engineering and chemicals sub-sectors.

Furthermore, manufacturers expect output growth to accelerate in the next three months.

"Manufacturing output probably still has scope to rise further in Q4, as formerly-furloughed staff are recalled and as manufacturers invest to enhance productivity," says Tombs. "Even if orders weaken next year, perhaps as restocking demand fizzles out, production will be supported by the large work backlogs that have accumulated this year."

The CBI report says stock adequacy for finished goods worsened to its weakest on record (since April 1977).

Meanwhile, expectations for output price growth in the coming quarter were at their strongest since May 1977.

“It’s good to see strong order books and output growth in the manufacturing sector holding up as we head into winter. Output growth has been steady for three months now and remains quicker than its long-run average," says Anna Leach, CBI Deputy Chief Economist.

She adds however that intense supply side challenges continue to put pressure on firms’ capacity to meet demand.

"Alongside record order books, stock adequacy was the weakest on record in November and manufacturers are increasingly having to pass on significant cost increases to customers," says Leach.

The Key Figures

Output growth in the three months to November (+17% from +15% in October, long-run average of +3%) continued at a similarly firm pace to the last two months.

Output increased in 12 of 17 sub-sectors, with growth mostly driven by the food, drink & tobacco, electronic engineering and chemicals sub-sectors.

Manufacturers expect output growth to accelerate in the next three months (+32%).

Orders

Total order books (+26% from +9% in October, long-run average of -14%) improved to their strongest on record (since April 1977).

Export order books (+3% from -7% in October, long-run average of -18%) improved to their strongest since March 2019.

Prices

Manufacturers anticipate that output price growth in the next three months will be fast (+67%), with expectations at their strongest since May 1977.

Stocks

Stock adequacy (-16% from -13% in October) worsened to its weakest on record (since April 1977).