UK manufacturers enjoy strong inflow of orders but costs rising sharply

British manufacturers have reported the strongest inflow of orders in nearly two years, according to the Confederation of British Industry, but are seeing costs rise sharply.

The CBI’s monthly industrial orders balance jumped to a 20-month high of +5 in January from zero in December and -3 in November, beating expectations of a rise to +2.

Manufacturing was fuelled by healthy domestic demand and a pick-up in export orders, with the export balance rebounding to -9 in January from -15 in December.

Exports are being boosted by selling prices becoming more competitive due to the sharp weakening of the pound.

The CBI reported firms' competitiveness in the EU rose strongly to a balance of +28% while their competitiveness in non-EU markets rose at the fastest pace in the survey’s history to +26%.

On the flip side, sterling’s depreciation meant further impact on prices as unit costs rose at their highest pace in over five years, amid expectations that this will intensify over the next quarter.

The balance of manufacturers expecting to raise output over the next three months climbed to +26% in January from +21% in December, the highest output expectations balance since July 2014.

Economist Howard Archer at IHS Markit said the robust orders data bodes well for the sector's output in the near term and he was encouraged to see investment intentions have improved.

"With the exception of the elevated prices balance, this is a thoroughly pleasing survey that indicates that the UK manufacturing sector has started off 2017 on the font foot and is confident about near-term prospects," he said.

He said the high and rising manufacturers’ pricing balance, and the sharp increase in manufacturers’ unit costs was "a rather large fly in the ointment", while domestic demand is expected to suffer from a drop in consumers spending, while demand for capital goods is likely to be further constrained as business confidence and investment plans are "increasingly pressurized by mounting uncertainty over the Brexit process".

January’s CBI Industrial Trends survey suggests that growth in manufacturing output is picking up, thanks largely to momentum in domestic demand. The overall orders balance continued to greatly exceed the export orders balance in January, although the latter increased to -9 from -15 in December. Meanwhile, the survey’s quarterly measures of business optimism and investment intensions increased to levels not seen since 2014, despite the Government raising the possibility of a “cliff-edge Brexit” which would see U.K. manufacturers lose preferential access to the single market.

Sam Tombs at Pantheon Macroeconomics said with price pressures building on all fronts, it "suggests that producer output price inflation will pick up to about 6% soon, from 2.7% in December, and will boost shop prices later this year.

"We doubt that order books will look as healthy as they do now after manufacturers have increased their prices sharply."