Demand for UK manufacturing reaches two-year high
Demand for British manufacturing has jumped to a two-year high, but plans for price hikes on the back of a weak pound threaten to hurt the sector.
The latest Confederation of British Industry (CBI) industrial trends survey showed that total order books improved further over the three months to February to a balance of 8%, rising from 5% in January and 0% in December.
The jump was led by demand in the mechanical engineering and metal production sectors, leading to the highest balance since February 2015.
But the poll - which surveyed 461 businesses - also found that 38% of companies expect to raise output prices over the next three months, while only 6% expect to cut prices, leading to a balance of 32%.
That is the highest forecast for price hikes in the manufacturing sector since April 2011, when the balance was 36%.
Manufacturers are looking to compensate for the drop in the pound, which has fallen more than 17% against the US dollar and 10% against the euro since the EU referendum last June.
CBI chief economist Rain Newton-Smith said: "Stronger demand and production is good news for UK manufacturers, though the weaker pound continues to push up input costs and this is now feeding through to output price inflation expectations."
However, businesses are still forecasting that output growth will rise over the next three months, with only 10% expecting a drop in production, while 43% expect a jump, leading to a balance of 33%.
Experts say the optimism is unlikely to last.
Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said: "The manufacturing sector is growing briskly right now, but likely will falter as producers push through large price rises later this year."
He added that the sector upturn is "worryingly dependent on domestic demand", which is unlikely to maintain its momentum when producers pass on input price hikes later this year.
He said: "The recent slowdown in household income growth, in response to flat employment and weakening wage growth, suggests consumers will have to cut back later this year when prices rise sharply.
"Accordingly, we continue to expect the manufacturing revival to lose considerable pace later this year."
The survey already clocked a slowdown in foreign demand, with export orders dropping to a balance of minus 10% from minus 9% in January.