Industry predicts upsurge in output: CBI survey finds British manufacturers in optimistic mood over production prospects and falling inflation

MANUFACTURING industry expects output to expand at the strongest rate for five years and inflation pressures are forecast to continue subsiding after the sharpest slide in 35 years, the Confederation of British Industry said yesterday.

But in its latest quarterly survey of industrial trends, the CBI warned of the uncertain outlook for recovery posed by tax increases. There was little evidence that manufacturers had become worried. But Sir David Lees, chairman of the CBI's economic affairs committee, said: 'Anecdotally, there has been some concern and the shadow of those tax increases means that it will be necessary and desirable to reduce interest rates further.'

Sir David said there was also anecdotal evidence of concern over the rising pound. But the CBI argued that fears over export prospects were largely extinguished by improved cost competitiveness.

The overwhelming evidence of the survey pointed to a stronger recovery with inflation subdued. It offers hope to analysts who expect a return to the golden era of the 1950s and 1960s, when manufacturing was stronger and inflation low.

Business confidence rose for the fifth sucessive survey in the sharpest increase since last April.

Mounting optimism over future output trends followed the fastest expansion in output in nearly five years over the past four months, which partly reflects a similar rate of expansion in total new orders.

The latest quarterly trade survey by the Building Employers' Confederation showed that construction firms are more optimistic about output than at any time since the recession began nearly four years ago. Enquiries for new work are rising and contractors are having more success in winning work.

Despite the rise in value of sterling against European currencies, the CBI said export orders rose in the past four months. Optimism over export prospects in the coming 12 months climbed sharply, matching a similar rise last April. The survey showed that despite the rising pound, export prices were cut for the third survey running.

It revealed that investment intentions turned positive for the first time in nearly five years. Better investment trends are an essential ingredient of a more balanced recovery, less reliant than previous expansions on consumer spending.

Although employment fell in the past four months, it was at the slowest rate in more than four years and the slowdown in job shedding is expected to continue. The CBI expects manufacturing employment to contract by 9,000 a month over the next three months.

The CBI also reported that stocks were reduced at the slowest rate since January 1990. Past business cycles suggest that companies start to build up stocks only when recovery becomes entrenched.

Welcoming the survey, a Treasury spokesman said: 'It suggests a further strengthening of the recovery in the months ahead. Particularly striking are the improved investment intentions and optimism over future export orders.'

Detailed results of the survey showed that 29 per cent of manufacturing companies surveyed thought output would rise in the coming four months, against 13 per cent who foresaw a decline. The resulting balance of 16 per cent was the highest since early 1989.

A balance of 27 per cent were more optimistic about their future business while 21 per cent expressed improved optimism over exports.

A balance of 11 per cent reported higher total new orders in the past four months and 22 per cent saw a further increase in the next four months.

A negative balance of 12 per cent thought unit costs had risen - the sharpest fall since the survey was launched in 1958. A further decline in costs is expected but despite that, a balance of 12 per cent expect to raise prices, partly reflecting annual price changes, which occur traditionally in January.

The divergence between costs and prices points to wider domestic profit margins in the months ahead.

(Graphs omitted)

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