British manufacturers’ output is falling at the fastest pace in more than two years, the UK’s largest business group has warned.
The volume of goods and services produced by factories fell by 9 percent in the three months to December 2022, according to the latest Industrial Trends Survey conducted by the Confederation of British Industry (CBI).
This was a steep drop from the 18 percent rise in output reported in the previous three months to November, and means it contracted at the fastest pace since September 2020.
The CBI blames the fall on high inflation and soaring energy prices, and expects manufacturing output to fall by another 10 percent in the three months to March 2023.
The firms surveyed also said that total order books were below normal, falling by 6 percent in December from a 5 percent decline in November.
The proportion of manufacturers expecting to raise prices in the next three months jumped from 47 percent in November to 52 percent in December.
The study, based on a survey of 220 manufacturing firms, found that output decreased in 11 out of 17 sectors. The decrease in overall output was driven by the food, drink, tobacco, paper, printing and media, and mechanical engineering sectors.
Gabriella Dickens, a senior UK economist at Pantheon Macroeconomics, said the outlook for the next year remains “grim.”
“Demand for industrial goods likely will be hit again in 2023, as real incomes are squeezed by the watering down of government support for energy bills and higher unemployment, and as businesses are forced to consolidate costs,” she said.
Inflation
The CBI said that the “corrosive” effect of higher inflation on the demand for goods has driven down output.Anna Leach, CBI deputy chief economist, said: “The corrosive effect of higher inflation on demand is increasingly clear, as manufacturing output contracting at the fastest pace in two years over the last quarter. While some global price pressures have eased in recent months, cost and price inflation will likely remain very high in the near term, with rising energy bills a key concern for manufacturers.”
According to the Office for National Statistics, the UK’s Consumer Prices Index inflation rate fell to 10.7 percent in November.
It marks a welcome drop from the eye-watering 11.1 percent seen in October, when soaring energy bills sent inflation to its highest level since October 1981, but the figure remains high by recent standards.
Food inflation was still surging last month, hitting a 45-year high of 16.4 percent, while power costs remain high despite government support limiting the annual average bill to around £2,500 ($3,100) since October.
The Bank of England, the UK’s central bank, announced on Dec. 15 that it had increased interest rates from 3 to 3.5 percent, a new 14-year high.
The bank’s Monetary Policy Committee said, “The labour market remains tight and there has been evidence of inflationary pressures in domestic prices and wages that could indicate greater persistence and thus justifies a further forceful monetary policy response.”
Energy Prices
Leach said that steep rises in the cost of energy bills have also weighed heavily on UK factories, which will need further support to cope in the year ahead.She said: “Government support for energy costs has been considerable already, buying time for businesses to adapt to Europe’s new energy landscape. And with the UK economy set to be in recession through much of 2023, there remains a strong case for further support in the coming year.”
Under the energy price guarantee introduced in September by then-Prime Minister Liz Truss, the energy price cap—limiting the average household energy bill to £2,500 ($3,044)—was to have lasted for two years from Oct. 1.
But after Jeremy Hunt replaced Kwasi Kwarteng as chancellor of the Exchequer, he announced that it would end at its current level after six months, after which more targeted help would be provided to the most vulnerable.
In his autumn budget unveiled on Nov. 17, he announced that the energy price guarantee will continue for a further 12 months from April, but will rise from the current £2,500 to £3,000 ($3,560) per year for the average household.
David Bharier, head of research at the British Chambers of Commerce, said last week that, though inflation may have “passed the peak,” the damage to business confidence has been “significant,” especially for small and medium enterprises (SMEs).
“With their margins left razor-thin, very few SMEs are planning to increase investment as they deal with a wall of higher energy bills, input costs, interest rates, and taxation. Over half of SMEs tell us they will struggle to pay their electricity and gas bills after April.”
Bharier said the small businesses will be “nervously awaiting” the government’s expected announcement on the future shape and extent of any energy costs support, which will also impact inflation.
