Industrial optimism at nine-year high

Confidence among British manufacturers is now stronger than it has been at any time over the past nine years, according to the Engineering Employers' Federation (EEF), which said strong demand from the US and the Eurozone was continuing to boost optimism.

The EEF said the proportion of manufacturers planning significant investments in their businesses was at its highest level since the end of 1997. The balance of companies planning capital expenditure against those with no plans to invest has reached 7 per cent, the EEF said. The positive balances for companies reporting higher output and orders are at 18 and 14 per cent.

The upbeat assessment of British manufacturing reflects a series of positive factors according to the EEF's third-quarter outlook survey, published today. It said growth was improving in every region of the country other than Northern Ireland, with firms reporting strong trading conditions. While domestic orders for manufacturers have slowed, the number of companies reporting rising demand from overseas is sharply up. The outlook for employment in the sector is also continuing to improve, the EEF reported.

The group predicted that the engineering sector would achieve total growth of 1.9 per cent this year, with manufacturers expected to grow 0.9 per cent. It forecast that growth in both industries would continue to pick up in 2007, reaching 2.3 and 1.2 per cent respectively.

Steve Radley, the chief economist at the EEF, said: "Our survey provides welcome evidence that UK manufacturers are exploiting the strength in world markets. We have now seen four quarters of strong growth in exports - the best sustained improvement since 1995."

Martyn Pilley, a corporate finance partner at the manufacturing and technology division of the accountant RSM Robson Rhodes, said the sector had performed particularly well given the problem of rising commodity prices.

"Energy costs and metal prices are still impacting on margins, but there are signs that these pressures are beginning to ease a little," Mr Pilley said.

The EEF's survey also revealed that manufacturers expect price rises to ease this year as companies attempted to remain competitive in the global marketplace.

That would reduce the pressure on the Bank of England's Monetary Policy Committee to raise base rates for a second time in 2006. The MPC is due to hold its latest monthly meeting on Wednesday and Thursday this week, following its decision in August to raise base rates for the first time in two years.

However, while economists do not expect a second base-rate increase this month, a survey from Your Move, the estate agency, warned that August's 0.25 percentage point rise has so far had little impact on the housing market.

It said property sales had risen by 11 per cent, year-on-year, in August. While the base-rate rise, announced in mid-August, would have come too late to derail this trend, Your Move also reported that 1.6 million potential homebuyers had registered an interest in August, 600,000 more than in the same month last year.

"Notwithstanding the interest rate rise and recent publicity about the high level of consumer indebtedness, homeowners seem to be in a positive frame of mind," said David Newnes, the managing director of Your Move.

"There was modest growth in mortgage applications in a month that in our experience is typically subdued, suggesting that borrowers remain confident but are taking a responsible attitude to credit."