British manufacturing in buoyant mood

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The CBI's latest survey of business paints a strikingly upbeat picture of British manufacturing industry, with optimism in UK factories reaching levels not seen since 1995.

Demand in August remained strong, with an increased balance of +9 per cent of firms reporting order books above normal against July's balance of -6 per cent.

However, there are marked differences between sectors and rather less confidence about future prospects. The survey was conducted partly during the recent market turmoil.

Firms making capital goods, such as industrial machinery, engines and agricultural equipment, said business was brisk, and consumer goods producers also enjoyed a return to healthy order-book levels.

However, manufacturers of components, parts and building materials suffered a deterioration in demand. Despite the strong pound, across manufacturing exports are healthy, with order-book levels considered broadly "normal".

The strength of demand for capital goods emanating from east Asia has played a significant role in generating industrial demand in many Western economies, most notably Germany.

After five months of strong expectations for increasing output, the balance of manufacturers forecasting growth dipped to +10 per cent in July and an only slightly better balance of +13 per cent in August. Since the 12-year high in May (a balance of +25 per cent), manufacturers' confidence in their ability to raise prices has fallen, but the balance of +16 per cent is still high relative to the past decade.

The Bank of England Monetary Policy Committee has highlighted this as one of the key considerations in setting interest rates, though the financial markets will now be uppermost in their minds.

Lai Wah Co, CBI principal economist, said: "While price pressures in the manufacturing sector have not gone away, the Bank of England can take some comfort from the expected slowdown in output growth as recent monetary policy appears to be having its desired impact. With the recent turmoil in world stock markets and the risk of spillover into economic activity, the Bank should continue to hold steady on interest rates."