Tentative manufacturing recovery

The strong pound hits exports and manufacturing

By Jenny Scott, BBC economics reporter

The outlook for the UK's ailing manufacturers remains gloomy, according to a survey released on Thursday,

But there are tentative signs that the worst may soon be over for the struggling sector.

A detailed report from the Confederation of British Industry, a business lobby group, showed that although demand in the battered sector remains well below normal, things are set to pick up slightly in the months ahead.

Of the 1,000 or so manufacturers polled, 32% said orders were below normal in August while 15% said they were above.

That left a balance of -17, an improvement on July's -20 and June's -18, but still less than the -10 recorded in May.

The equivalent index for expected output was at plus two, down from three in July but up from -7 in June.

Exports tough

But conditions in the sector remain tough.

Firms are struggling to raise prices - the survey's average prices balance was stuck at -15 in August. Many are still battling to win overseas orders in the face of a strong pound.

The rise in sterling in recent years makes British imports cheaper but exports more expensive, forcing manufacturers to cut costs and shed jobs in order to gain a competitive advantage.

The CBI survey suggests that strategy may be starting to pay off.

Although export orders remained well below normal in August, they had recovered from the lows of June and July.

The export balance rose to minus -35 in August from -41 in July and -39 in June.

Rate negative

Sudhir Junandar, the CBI's Associate Director of Economic Analysis, said UK exporters appeared to be cashing in on growth in the US and Europe.

"However, sterling's strength against the euro is still causing a headache for exporters," he said.

"The competitive pressures facing manufacturers remain intense, signalling the likelihood of further price cuts, and manufacturing remains in a fragile state."

Analysts said the survey would do little to convince members of Britain's interest rate setting Monetary Policy Committee to raise borrowing costs when it meets early next month.

"This survey is better than it could have been, and better than it was at the start of last year," said Mark Miller, economist at Morgan Stanley Dean Witter.

Economic growth

"But it's only because world trade growth is healthy that the manufacturing sector is avoiding recession at the moment. In terms of interest rates, I think they'll remain on hold in September."

The nine-strong MPC has left British borrowing costs on hold at 6% since February.

Analysts are divided over the chances of another quarter point rise next month following a stream of conflicting evidence of inflationary pressures in the UK economy.

The CBI also released its economic forecasts for the British economy on Thursday, which showed growth advancing at a healthy clip for the remainder of the year, then slowing slightly in 2001.

GDP is seen as growing by 3.1% this year before slowing to 2.7% in 2001, still comfortably above the trend rate of around 2.25% growth recorded, on average, over the last 40 years.

It says underlying inflation, which excludes volatile home loan costs, is expected to remain below the government's 2.5% target, coming in at 2.3% by the end of this year and rising to 2.4% by the end of 2001.