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British industry’s output now at record growth levels

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British factories enjoyed the strongest growth in output on record in June but warned they expected to raise their prices at the fastest pace in nearly 40 years in response to a shortage of key components and materials.

The Confederation of British Industry said its quarterly survey of manufacturing showed that the rebound across the sector was gaining momentum going into the autumn.

The business lobby group said that with Europe, the US, China and much of Asia lifting coronavirus restrictions, its monthly index of industrial output growth over the past three months had set a blistering pace – to reach the highest since the survey began in 1975.

Anna Leach, the CBI’s deputy chief economist, said reports of growth in output and orders came from all sectors of industry. The car industry, which had a huge drop in production last year, was among the top performers in June, along with the food and drinks sector. “And it looks set to continue in the coming quarter,” she said.

Separate figures from the Office for National Statistics showed the government borrowed less than expected in May, when the reopening of the economy prompted a rush to the shops and pushed VAT and fuel duty receipts higher. Borrowing last month was £24.3bn, undershooting the £28.5bn estimate by the Office for Budget Responsibility.

The amount was the second-highest borrowing total for the month of May since records began in 1993 but was £19.4bn less than in May 2020 when the impact of the first coronavirus lockdown was reflected in the public finances.

The CBI index measures the difference between the proportion of employers who say activity is above or below normal levels. From 307 responses the survey found that 52% said output was up, 32% said it was the same, and 16% said it was down to give a weighted index score of +37, up from +18 in May and +3 in April.

The orders balance, which shows the growth in new domestic and export orders, hit +19 in June, up from +17 in May and its highest since 1988.

However, Leach warned that supply shortages continued to bite, and firms expected that to push through into prices in the months ahead.

Output price expectations for the next three months increased at the fastest pace for 40 years, from a balance of +38% in May to +48 in June.

Stock levels shrank to their lowest since the CBI first recorded them in 1977. Manufacturers have cited shortages of timber, metals and computer chips as reasons for output remaining below demand.

Labour shortages in some sectors have also made matters worse and forced firms to pay existing staff higher overtime rates and in some cases retention bonuses to prevent their leaving.

Leach said the survey’s price balance, which rose to +46 from +38 in May, the highest since 1982 and well above its average of +3, showed that “firms expect that to push through into prices in the months ahead”.

The orders balance in the June survey was prevented from hitting record highs by the struggling export sector. The export orders balance showed a majority of manufacturers reported that commissions from overseas were “lower than normal”, despite a surging global goods demand.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, said the downbeat response of exporters illustrated the continuing difficulties with trade between the UK and its biggest trade partner, the EU. “Brexit has constrained the recovery,” he said.

In recent weeks hauliers have complained that red tape at UK borders and a shortage of drivers has hit trade with the EU.

Tombs said he was also concerned that the responses from manufacturing businesses might be skewed by what they considered to be “normal” after 16 months of the pandemic. It might be that they have a lower baseline for their judgments, meaning that only a relatively small rise in orders could trigger a more positive response.

The boom in orders is also likely to be shortlived, he said, as consumers switched away from buying goods to buying services once lockdown measures were completely lifted.

Tom Crotty, group director at the chemicals firm Ineos, and chair of the CBI manufacturing council, said: “It is hugely reassuring to see the manufacturing sector performing well after a particularly difficult start to the year. There is a real sense of optimism from many in the sector that there are good times ahead.

“However, the picture is not all rosy, with firms continuing to face difficulties arising from supply chain disruption and cost pressures. Staff shortages are also causing issues for many manufacturing businesses across the country.”

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British industry’s output now at record growth levels

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