Record output growth for manufacturers, but cost pressures & supply concerns loom large

The survey of 250 manufacturing businesses reported output increasing in 16 out of 17 sub-sectors, led by the motor vehicles & transport equipment and food, drink & tobacco sub-sectors.

Manufacturers expect output to grow at an even quicker pace in the next three months – the strongest growth expectations on record.

Furthermore, total new orders grew at their quickest pace since 1974. This reflected domestic orders expanding at their fastest rate on record (since 1975), and the first rise in export orders since January 2019.

Meanwhile, numbers employed in the sector grew at their fastest pace since 1973, and are expected to increase at a slightly faster rate in the next three months.

Business optimism growth remained strong by historical standards, despite slowing from last quarter. The outlook further ahead is also more positive, with investment intentions for plant & machinery and training & retraining improving to their strongest since 1988 and 2015, respectively.

However, concerns about the availability of materials/components, skilled labour, and plant capacity as factors likely to limit output next quarter were at their most heightened since the mid-1970s.

The manufacturing sector also continues to face acute cost pressures. Firms reported that average costs growth in the three months to July accelerated to its fastest pace since 1980.

These cost pressures have fed into quicker output price growth, with average domestic and export prices in the last quarter increasing at the fastest rates since 1980 and 2017, respectively.

Looking ahead to the next three months, costs growth is set to ease somewhat (but remain high by historical standards), while domestic output price inflation is anticipated to accelerate further. In contrast, growth in export prices is expected to slow.

Rain Newton-Smith, CBI Chief Economist, said:
“Record growth in manufacturing output volumes is further evidence that UK industry is reawakening following the economic ravages of the pandemic. Demand is rising rapidly, leading businesses to hire more staff and plan further investment in plant & machinery and training. Encouragingly, manufacturers expect further record output growth in the coming quarter.
“Yet other challenges lie ahead. Acute staff shortages evident across the economy are biting deeply within manufacturing, with skills in short supply and the number of people isolating climbing steeply.
“Businesses have already endured a prolonged period of inhibited demand, so it is vital that government now takes all possible steps to protect this resurgence in activity.
“In the short-term, that should mean an immediate rethink on self-isolation rules. A test-and-release system which enables healthy people to return to work would help, as would freeing double-jabbed people from isolation obligations. This would ensure manufacturers can operate at full capacity, and work towards capitalising on a swift recovery.”

Tom Crotty, Group Director at INEOS and Chair of the CBI Manufacturing Council, said:

“It has been a strong summer for the UK’s manufacturing sector, with orders and output performing well. It is also very welcome to see firms planning on investing more in their longer-term productivity through spending on skills and machinery.
“However, it is not all positive news for the sector; many firms are grappling with staff shortages and facing difficulty accessing materials, all of which is putting a huge strain on operations. It will be essential for the government to work with manufacturers to address these challenges if the sector’s strong performance is to continue.”

Key findings
Output

• Output volumes in the three months to July grew at the joint-fastest pace on record (+37% from +37% in June – record since 1995).
• Output increased in 16 out of 17 sub-sectors, with headline growth being driven by the motor vehicles & transport equipment, and food, drink & tobacco sub-sectors.
• Manufacturers expect output growth to accelerate further next quarter (+44%), marking the strongest expectations for growth on record.
• The share of firms citing orders or sales as a factor to limit output next quarter fell to its lowest since 1974 (42%). However, the proportion of firms citing materials/components (56%), skilled labour (36%) or plant capacity (31%) as limiting factors stood at its highest since January 1975, July 1974, and January 1974, respectively.

Orders

• Total new orders in the quarter to July grew at their quickest pace since January 1974 (+48% from +5% in April).
• Domestic orders (+42%) expanded at the fastest pace on record (since April 1975), while export orders growth (+12%) stood at its quickest since July 2018.
• Manufacturers expect total new orders growth to ease next quarter (+29%).

Headcount

• Numbers employed in the quarter to July (+24% from +10% in April) grew at their quickest rate since October 1973. Headcounts are expected to increase at a slightly faster pace next quarter (+28%).

Costs and prices

• Average costs growth in the quarter to July accelerated to its fastest since April 1980 (+73% from +48% in April). Costs growth is expected to ease next quarter, despite remaining quick by historical standards (+56%).
• Average domestic prices grew in the quarter to July (+37% from +19% in April) at the quickest rate since April 1980, and growth is expected to accelerate further next quarter (+42%). Average export prices grew in the quarter to July (+18% from +10% in April) at the fastest pace since July 2017, but growth is expected to slow next quarter (+11%).

Stocks

• Stocks of raw materials (+15% from +2% in April) and work in progress (+20% from +3%) in the quarter to July grew at a faster pace. Stocks of finished goods remained broadly flat (+3% from +4% in April).
• Manufacturers expect stocks of raw materials (+16%) and work in progress (+20%) to grow at similar rates next quarter, while stocks of finished goods are anticipated to expand modestly (+5%).

Business sentiment

• Business optimism growth slowed in the quarter to July (+27 from +38 in April).

Investment intentions

• Investment intentions for the next 12 months (compared with the previous 12) improved for plant & machinery (strongest since April 1988) and training & retraining (strongest since January 2015).
• Firms expect to spend more on product & process innovation but to a lesser degree than last quarter, while spending on buildings is set to stay broadly unchanged.
• The share of firms citing inadequate net returns (21%) as a factor to limit capex fell to its lowest on record, while the proportion citing uncertainty about demand (43%) dropped to its lowest since April 2014.