UK industrial orders and input prices rise in February, CBI finds

UK manufacturer's order books climbed to a two-year high, according to the CBI's industrial trends survey for February.

The balance of total orders over the three months was +8, up from the +5 in the previous survey and beating the consensus forecast of a small dip to +3. The balance is not seasonally adjusted.

This came from the difference between the 27% of businesses that reported total orders were above normal and the 19% that said orders were below normal, giving the highest balance since February 2015.

But some economists argued that one seasonally adjusted terms the balance was essentially flat.

Looking forward, the sector is likely to face price pressures, with the survey finding the balance of firms planning to lift selling prices rose to +32 from the previous survey's +28.

Firms expect prices to rise strongly over the next three months, the CBI said, with expectations at their firmest since April 2011 as sterling’s depreciation continues to increase the cost of raw materials.

The pick up in total orders came from domestic demand, with the export orders balance slipping down to -10 from -9 in January.

On the upside, output expectations picked up, with the balance rising to +33 from +26.

“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," said Rain Newton-Smith, the CBI's chief economist.

With cost pressures building, she said businesses will be looking to the Chancellor's Budget for relief from business rates, specifically bringing forward the adjustment from RPI to CPI.

Manufacturing to support GDP, but price pressure to tell

The survey adds to the evidence that the manufacturing sector is "getting back onto its feet", said economist Ruth Gregory at Capital Economics, which should help prevent GDP growth from losing too much momentum in the quarters ahead.

She said the CBI report chimes with evidence from other surveys, such as the Markit/CIPS manufacturing survey and Bank of England agents’ scores, which are consistent with quarterly growth of about 1-2% in early 2017.

"The sector looks on course to provide a positive contribution to GDP growth in Q1. And with manufacturing exports set to benefit from the fall in sterling and solid demand from abroad, the future looks more promising for manufacturing activity than it has done for some time."

While the sector is growing briskly right now, the total orders balance often rises between January and February, said Samuel Tombs at Pantheon Macroeconomics, adding that the sector is likely to falter as producers push through large price rises later in the year.

Tombs said the sector's upturn remains "worryingly dependent" on domestic demand, with selling prices balance is consistent with producer output price inflation picking up to about 6% soon.

"It remains difficult to see how domestic demand will maintain its momentum when producers push through even bigger price rises," he said, boding ill for consumers later this year when prices rise sharply.