Scottish manufacturers suffer decline as weak pound drives up costs not orders

The latest CBI Scottish Industrial Trends Survey showed domestic and export orders fell north of the border in the three months to October as Scottish firms were buffeted by post EU referendum political and economic uncertainty.

Despite a brief recovery in trading in July in the immediate aftermath of the EU vote, employment fell again as costs increased and another quarter of woe for workers is predicted over the next three months.

The survey of 37 Scottish manufacturing firms was carried out between 26 September and 13 October, when the pound averaged 1.13 Euros and $1.27.

A total of 30 per cent of firms said the volume of output over the past three months was up and 22 per cent said it was down, giving a balance of +8 per cent.

However, this was down from +35 per cent in July.

Meanwhile, 13 per cent of Scottish manufacturers said employment numbers were up, and 26 per cent said they were down, giving a rounded balance of -13 per cent - the lowest figure since January 2012.

CBI Scotland director Hugh Aitken said: “It had been hoped that Scottish manufacturers would see a continuation of the recovery seen in the second quarter of this year, but our latest survey shows order volumes and employment slipping over the last three months.

“Amid sluggish GDP growth relative to the rest of the UK, this is a reminder of the very significant challenges facing businesses in Scotland as they contend with economic and political uncertainty.

“It underlines again the need for the Scottish and UK governments to work together to provide clarity for companies and secure the best deal possible in the EU negotiations.”

He added: “It’s also more important than ever for the Scottish government to make decisions in the upcoming budget that make businesses as competitive as possible.”

However, firms said they did expect new orders and export orders to increase in the next quarter as the pound continues to trade at near-historic lows, despite a rise in costs.

The weaker pound appears to have had more of a positive effect in the rest of the UK where manufacturing output and orders grew over the last quarter, with export volumes growth the strongest for two and half years.

The latest quarterly CBI Industrial Trends Survey of 459 manufacturers revealed that competitiveness in EU markets rose at the fastest pace since the series began in 2000, with competitiveness outside the bloc also improving at the quickest rate since 2009.

Domestic demand grew modestly, while export orders rose for the first time in over a year. The outlook for demand over the next three months is generally positive, with export orders expected to rise further, along with more modest growth in domestic orders. But concerns persist about the availability of skilled labour, with almost a quarter of respondents observing that skilled labour availability could limit output over the next few months.

Optimism about the business situation fell slightly again following last quarter’s sharp decline. And numbers employed fell slightly for the first time since 2010 and look set to fall faster over the quarter ahead. But investment intentions improved following the decline last quarter, and investment plans for the year ahead are now more firmly above their long-run averages.

Following sterling’s sharp depreciation, unit costs rose at their fastest pace in three years, and are expected to continue growing at above their long-term average over the quarter ahead. This was accompanied by modest domestic price inflation, as manufacturers sought to pass on some of the cost increase to their customers. Despite welcome signs of improved export demand and competitiveness, the majority of exporting manufacturing firms have said that the fall in the pound since June has had a negative impact on their business. In a supplementary question asked alongside this month’s survey, 47% of manufacturing firms cited sterling’s depreciation as having a negative impact, against 32% citing a positive impact.

Rain Newton-Smith, CBI Chief Economist, said: “Manufacturers are optimistic about export prospects and export orders are growing, following the fall in Sterling.

“However, the weaker Pound is also feeding through to costs, which are rising briskly and may well spill over into higher consumer prices in the months ahead.

“Access to skills clearly remains a high priority, so manufacturers will be looking to the Government to implement a new migration system that meets the needs of business while responding to clearly-stated public concerns. Maintaining a preferential route between the UK and the EU, our largest trading partner, will be important.

“Meanwhile, firms will be seeking further details on a long-term, industrial strategy from the Autumn Statement that combines sectors and places.

“Ultimately, all businesses need greater clarity from the Government on the fundamental issues of skills and barrier-free access to EU markets as soon as possible.”