Factory orders leap to two-year high despite slowdown fears

Britain's manufacturers have seen factory orders jump to their highest level in more than two years despite concerns that the UK economy is slowing, according to a report.

Factory orders have reached levels not seen since February 2015
Factory orders have reached levels not seen since February 2015

The Confederation of British Industry (CBI) Industrial Trends Survey said total order books beat expectations to plus 9% in May, up from plus 4% in April, its biggest rise since February 2015.

Output growth recorded its fastest rise since December 2013 at plus 28%, thanks to a strong performance from the mechanical engineering and chemicals sector.

Exports orders also equalled a four-year high last seen in March, reaching plus 10%.

However, the industry continued to grapple with pressure on prices, as the Brexit-hit pound pushes up the cost of imported materials.

Rain Newton-Smith, CBI chief economist, said: "The summer sun has come out early for Britain's manufacturers. Robust demand at both home and abroad is reflected in strong order books, and output is picking up the pace.

"On the other side of the coin, though, we have mounting cost pressures and expectations for factory-gate price rises are running high.

"Boosting productivity is key to alleviating some of the cost pressures that manufacturers are facing. Sustained investment in innovation and education will be vital to shore up the success of British industry."

The survey, which gathered responses from 432 manufacturers, said 37% of firms are expecting robust output growth over the coming quarter, with 10% expecting a decline, leaving the balance at plus 28%.

The latest manufacturing figures from the Office for National Statistics showed output fell 0.6% in March, but recent industry surveys have painted a brighter picture.

The closely-watched Markit/CIPS UK Manufacturing purchasing managers' index (PMI) for April showed activity had leapt to a three-year high on the back of strong domestic and overseas demand.

Sterling's slump since the Brexit vote has benefited UK manufacturers by making their goods cheaper for overseas buyers.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the Brexit-hit pound and a rebound in world trade were helping the industry.

He said: "The 3% year-over-year growth rate of manufacturing output signalled by the CBI's survey, however, is not sufficient to offset fully the slowdown in the consumer sectors of the economy brought on by sterling's depreciation.

"What's more, the risk that the UK leaves the EU without a deep trade deal in place is casting a cloud over the outlook for manufacturing."

Howard Archer, chief UK and European economist at IHS Markit, said: "This is an encouraging survey that fuels hopes that the UK economy is on course for some pick-up in growth in the second quarter after gross domestic product expansion more than halved to 0.3% quarter-on-quarter in the first quarter.

"Hopes of improved second quarter growth got a significant boost from retail sales picking up markedly in April, although they were helped by warmer weather and serious concerns remain over the squeeze on consumer purchasing power."