Manufacturing investment budgets shrink as strong pound hits profits

Manufacturing firms slashed their investment budgets over the summer, according to figures yesterday that raised fears for the sector's health.

Manufacturing firms slashed their investment budgets over the summer, according to figures yesterday that raised fears for the sector's health.

Private sector manufacturers' investment fell to £4.45bn in the second quarter from £4.57bn in the first quarter, a drop of 2.6 per cent, the Office for National Statistics said.

Investment by other production companies, which includes the agricultural sector, slumped by 14 per cent while construction firms cut spending by almost 16 per cent.

The Confederation of British Industry said that the figures backed its concerns that the strength of sterling and fierce competitive pressures were putting margins and profits under pressure.

But an enormous 49 per cent increase in spending by public corporations - which include London Transport and the Post Office - and more modest growth in the services sector helped total business investment rise by 0.4 per cent to £28.74bn.

Private sector services, which had been stagnant for most of 1999 in the immediate run up the Millennium, enjoyed a 2.3 per cent rise.

Sudhir Junankar, a senior economist at the CBI, said: "We can see quite clearly the pressure on manufacturers. It points to weak investment, reflecting the strength of sterling and the pressure on margins."

He said it had backed up the latest CBI survey which highlighted the inadequate rate of return on expenditure as the main disincentive to carrying out investment.

Within manufacturing there was sharp divergence in fortunes. The fuel and oil industries cut their investment by 28 per cent, textiles by 11.8 per cent and food, drink and tobacco by 10.7 per cent while "other manufacturing" dropped 11.8 per cent.

But metals and metal goods rose almost 12 per cent, and engineering and vehicles fell 10.7 per cent.

Stephen Radley, the chief economist at the Engineering Employers Federation, pointed out that investment by metals firms was still 28 per cent down on the the end of 1998. He said the rise in engineering was probably attributable to the booming mobile phone industry. Mr Radley said: "Our second quarter survey, which looks over the coming year, showed investment intentions becoming more negative, and that will show their impact in the next few batches of figures."