July 30, 2007	Monday	Rajab 14, 1428

The growing strength of the pound and the weakening dollar seem to have started adversely impacting on UK’s exports. According to a the latest quarterly survey of industrial trends published by the Confederation of British Industries (CBI) ,export order fell this quarter a net balance of minus five per cent of firms.

Sentiment regarding export prospects in the coming year is little changed from three months ago (-1 per cent) and firms are no more concerned about world political or economic conditions than they were in April.

Indeed, export prices stayed broadly unchanged and are expected to remain so. But an above average proportion of exporters says delivery dates are likely to limit their business, which may reflect pressure from tighter shipping capacity and soaring freight rates.

As a result, the growth in demand for UK manufactured goods has slowed slightly but still remains firm. In the three months to July, manufacturers’ total new orders grew at the slowest rate since last autumn, with export order volumes falling noticeably for the first time in 18 months. Demand growth remains above average, however, when compared to the last decade.

Firms' total order book levels have also dropped, relative to 'normal', after a run of improving responses (from +2 in April, +5 in May and +8 per cent in June to -6 per cent in July). Export order book levels also eased (a balance of -8 per cent).

Prices of manufactured goods continued to rise, but more slowly than in January or April. And with costs reported to have risen as rapidly as in October, manufacturers were not able to repair profit margins as previously. Export prices remained broadly unchanged.

Manufacturing output grew more slowly than expected, with further modest growth predicted for the next three months. When asked to compare the general business outlook to three months ago, roughly as many were optimistic as were pessimistic.

Volumes of total new orders rose over the past quarter for a balance of +7 per cent of firms, which disappointed expectations and came below April’s peak (+12 per cent). The growth in new orders remains above the long-term average (-3%), however.

The best expectations for output growth in two years failed to materialise, with slightly slower growth (+3 per cent) than in April (+6 per cent). The slowdown was most marked in capital goods, such as heavy machinery. A balance of 10 per cent expects the volume of overall manufacturing output to increase over the next three months.

There was an easing back in the rate of increase of domestic prices (a balance of +10 per cent), with slower rises in the prices of consumer and intermediate goods (such as building materials, fibres and chemicals). Expectations are that prices will increase at a similar rate (+11 per cent).

Unit costs showed an unexpected bounce back last quarter, with a balance of +24 per cent reporting an increase. Rises in the prices of oil, commodities and freight since April have all contributed.

The proportion of firms working below capacity fell further, to a level not seen for a year (50 per cent). But the proportion with capacity at least adequate to meet demand rose slightly, to +89 per cent.

Investment intentions are picking up, however, with an improvement seen across every category. Greater investment is planned for training and for product and process innovation. The least negative balances in at least three years were recorded for intended investment in buildings (-14 per cent) and plant and machinery (-6 per cent).

As a constraint to output, however, skilled labour is cited by the largest proportion of firms since 2001.

Fewer manufacturing jobs were lost than expected (a balance of -9 per cent compared to the expected -16 per cent). Firms now have the most modest expectations for the decline in employment since July 2004 (-9 per cent). Based on the survey, the CBI estimates 5,000 jobs were lost from the sector in 2007 Q2, and that 8,000 will be lost over Q3, bringing the total employed in manufacturing to 2,947,000.

Sentiment about the general business situation and about exports prospects for the year ahead were flat, following an improvement in April.

The CBI’s Chief Economic Adviser, Ian McCafferty said: “While the recent manufacturing growth looks to have moved down a notch, we should not be speculating about an end to this year’s manufacturing recovery.

"Many signs point to a fairly healthy outlook for manufacturers, with improved investment plans across the board and markedly slower falls in employment.

"UK exports had been resolute in the face of a strong pound for a number of months but a combination of a slower US economy and sharp increases in the price of oil, commodities and freight is beginning to tell for exporters."

The July 2007 CBI Quarterly Industrial Trends Survey was conducted between June 21 and July 11 2006 2007 and there were 576 responses across 50 sectors. During the survey period the pound averaged euro 1.44 and $2.01. Brent crude averaged $72.80 per barrel. In the previous quarterly survey in April the pound averaged euro 1.46, $1.97 and $66.15 per barrel of Brent crude.

Sterling, which had scaled a fresh 26-year high against the greenback of $2.0655 during early morning trading on Tuesday last, fell to $2.0599 on the back of the weak figures, which the Guardian in its Wednesday’s (July 25, 2007) edition said suggested that interest rates may need to rise less aggressively than the City's expectations of six per cent and beyond .

"The sharp drop in the CBI industrial trends survey underlines that the Bank of England cannot keep hoisting rates with impunity," said David Brown, economist at Bear Stearns was quoted by the newspaper as saying. He added that although the GDP figures last week indicated that the economy would expand at a robust three per cent this year, the CBI survey suggested that the underlying economy was starting to weaken and the rate of growth could fall very sharply next year if borrowing costs hit six per cent. Economists still expect the Bank of England to raise interest rates again this year, but after the survey results they said this was more likely to happen later than sooner.

"Today's (last Tuesday’s) report bolsters our view that the next hike will prove the last in this cycle while leaving us confident the bank will wait until the November Inflation Report before delivering this move," Richard McGuire at RBC Capital Markets was quoted as saying by the Guardian.