UK factory orders expected to fall despite easing cost pressures

SMEs expect new factory orders to fall in the next three months. Photo: PA
SMEs expect new factory orders to fall in the next three months. Photo: PA

Britain's small and medium sized manufacturing firms (SMEs) expect factory output and orders to fall in the next three months despite easing cost and price growth pressures.

Analysis from the Confederation of British Industry (CBI) shows production came to a near-halt in the quarter to July, and is expected to fall slightly in the next three months to -6%.

Total new orders stagnated in the three months to July (2% from 22% in the quarter to April), according to the latest CBI Trends Survey. In the next three months, firms expect total new orders to decline to -18%.

Growth in average unit costs and average domestic prices eased slightly during the period, but both remained strong, CBI said.

SMEs see growth in both costs and prices to ease further in the three months ahead to 69% and 40%, respectively.

The survey of 218 SME manufacturing firms, found business optimism fell again in the quarter, and investment intentions for the year ahead also worsened.

Volume of domestic new orders. Chart: Confederation of British Industry
Volume of domestic new orders. Chart: Confederation of British Industry

Economist say the "sombre outlook" for SME manufacturers continues to stifle optimism.

"Output and new orders are expected to decline over the next three months. Despite easing slightly, cost growth remains acute and investment appetite is petering out," Alpesh Paleja, lead economist at CBI, said.

Read more: UK factory slump deepens ahead of Bank of England interest rates rise

The figures follow similar warnings from industry groups and companies ahead of the Bank of England's looming interest rates rise on Thursday.

Separate analysis from the S&P Global/CIPS show UK's factory output and new orders shrank at the fastest rate since May 2020 as the cost of living crisis, inflation, weaker domestic demand, and "lingering" post-Brexit issues weighed.

Manufacturing PMI fell to 52.1 last month from 52.8 in June, and slightly below the preliminary "flash" July reading of 52.2.

Read more: UK firms most worried about soaring costs and energy bills

Recent data from the Office for National Statistics found that the number of businesses worried about soaring energy bills and input costs has risen.

According to the ONS, 26% of companies reported input price inflation as their main concern for August 2022, and 20% reported energy prices.

Meanwhile, prices paid by factories for materials and energy were 24% higher last month than a year earlier — the biggest increase since records began in 1985 — while prices charged by factories jumped by 16.5%.

The BoE last month warned the UK economy is likely to slow to a crawl this year and in 2023 as consumers face the highest inflation in 40 years and many businesses face a squeeze on their profits.

Watch: How does inflation affect interest rates?