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UK Jan manufacturing orders balance

Tuesday, January 22, 2008

(adds analyst comment)

LONDON (Thomson Financial) - The UK's manufacturers appeared to have started the new year in fairly resilient mode despite mounting concerns about the world economy in the wake of the credit crunch, according to a survey of the sector.

The Confederation of British Industry revealed that the manufacturing total orders balance in January was +2 pct, unchanged on the previous month. On a quarterly basis, that was the highest balance since April 1995's +8 pct.

The January balance was slightly higher than expectations for a zero balance.

Exporters themselves saw their order books decline slightly but do not show any sign of going into freefall in the wake of the sharp slowdown in the US.

Their orders balance fell to -4 pct against +2 pct in December.

Price pressures though remain with the average prices balance for the next three months rising to +21 pct from +15 pct in December. On a quarterly basis, January's outcome is the highest since January 1995, although the level was matched in November 2007.

In its quarterly questions the CBI found business optimism declining in line with market expectations.

The business optimism balance dropped to -18 pct, its lowest since October 2005's -21 pct, and from -13 pct in the previous quarterly survey in October.

Ian McCafferty, the CBI's chief economic adviser, said manufacturers share similar concerns to other sectors about the economy, that rising costs will coincide with slowing demand.

"Thankfully, the expected wobble in demand didn't materialise in the last three months and orders for British-made goods have held up, particularly from abroad," he said.

"What we are seeing is part of a necessary rebalancing of the economy, in the face of slowing demand," he added.

The CBI acknowledged that the Bank of England faces a dilemma over the next few months as it tries to weigh up growth and inflation concerns.

"Price pressures from oil and food costs will bring higher inflation in the short-term and may push the inflation rate further above target during 2008, making the Bank's decision even more difficult," said McCafferty.

Though there is a growing view that inflation may rise above target this year in the wake of sky-high energy and commodity prices, the BoE is still expected to cut interest rates in the months to come, starting next month with a quarter point reduction in the Bank Rate to 5.25 pct.

On the whole the survey is not as weak as suggested by the drop in business optimism, said Paul Dales at Capital Economics.

"With the monthly total orders balance holding steady at +2, business optimism has fallen by more than might normally be warranted by the hard data on activity," he said.

Additionally, the rise in the monthly price expectations balance suggests that firms think that demand will be strong enough to raise their prices further, he added.

Still, given the backdrop of a slowing global economy, Dales believes the the sector will enter a recession, adding to, rather than offsetting, a consumer slowdown.

Posted by MOHAMED SAID at 5:13 AM  

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