Manufacturers have had a lot to grapple with over the past two years. Responding to very rapid changes in economic conditions meant big decisions on where to reduce costs, how hold on to skilled employees; how to manage supplier relations and where to focus efforts and resources for the recovery.
Production is now on the rise again and, barring any major revisions, the official statistics in August should confirm the decent expansion in output that other surveys have been pointing to. The drive to improve efficiency and retain a focus on innovation and product development through the recession has left many companies well placed to take advantage of the recovery in orders.
However, as I highlighted last month, it may not necessarily be plain sailing for the remainder of the year. Credit conditions look like they will improve only gradually, whereas the risks to recovery in key markets don’t appearing to ebbing at all. The impact of significant spending cuts and where they will fall is a further unknown.
While the recovery in world trade has been a driving force behind the improving order outlook for UK companies, it has also pushed up input prices. Rising costs have been back on the agenda when speaking to members and for some specialist raw materials delivery times are being extended and signs of shortages have emerged. Commodity prices have come back from last years lows and while the pace of acceleration in emerging economies is starting to ease, the IMF’s latest assessment of the world economy puts non-oil commodity price growth in double digits this year.
However, manufacturers aren’t the only ones concerned about rising prices. Inflation in the UK has been stuck above the Bank of England’s target for the past six months. Some of this can be attributed to temporary factors, such as VAT returning to 17.5 percent in January and the falling price of fuel a year ago. And a weaker exchange rate has also raised the cost of imports.
These factors should start to unwind through the rest of the year, but with another VAT rise in the pipeline, households’ expectations about future prices have been creeping up. This has not escaped the radar of some Monetary Policy Committee members, which are concerned that expectations are becoming decoupled with their inflation target.
Moreover, expectations of higher prices could start to feed through to higher wage demands for companies. EEF’s Pay Bulletin has shown average settlement levels picking up since the turn of the year, following 12 months where a majority of companies kept pay on hold. If higher inflation persists these could be harder to resist.
But the Committee is unlikely to raise interest rates when the recovery prospects – both here and in key markets – looks so uncertain. Both rates and the Bank’s asset purchase program were kept on hold in July’s meeting. August’s Inflation Report will give us more of steer on how the Committee views the risk to both inflation and growth and how confident the Bank is that spare capacity in the economy will bring inflation back to target.
It seems that a difficult balancing act will continue to face both companies and policy makers in the months ahead.
Production is now on the rise again and, barring any major revisions, the official statistics in August should confirm the decent expansion in output that other surveys have been pointing to. The drive to improve efficiency and retain a focus on innovation and product development through the recession has left many companies well placed to take advantage of the recovery in orders.
However, as I highlighted last month, it may not necessarily be plain sailing for the remainder of the year. Credit conditions look like they will improve only gradually, whereas the risks to recovery in key markets don’t appearing to ebbing at all. The impact of significant spending cuts and where they will fall is a further unknown.
While the recovery in world trade has been a driving force behind the improving order outlook for UK companies, it has also pushed up input prices. Rising costs have been back on the agenda when speaking to members and for some specialist raw materials delivery times are being extended and signs of shortages have emerged. Commodity prices have come back from last years lows and while the pace of acceleration in emerging economies is starting to ease, the IMF’s latest assessment of the world economy puts non-oil commodity price growth in double digits this year.
However, manufacturers aren’t the only ones concerned about rising prices. Inflation in the UK has been stuck above the Bank of England’s target for the past six months. Some of this can be attributed to temporary factors, such as VAT returning to 17.5 percent in January and the falling price of fuel a year ago. And a weaker exchange rate has also raised the cost of imports.
These factors should start to unwind through the rest of the year, but with another VAT rise in the pipeline, households’ expectations about future prices have been creeping up. This has not escaped the radar of some Monetary Policy Committee members, which are concerned that expectations are becoming decoupled with their inflation target.
Moreover, expectations of higher prices could start to feed through to higher wage demands for companies. EEF’s Pay Bulletin has shown average settlement levels picking up since the turn of the year, following 12 months where a majority of companies kept pay on hold. If higher inflation persists these could be harder to resist.
But the Committee is unlikely to raise interest rates when the recovery prospects – both here and in key markets – looks so uncertain. Both rates and the Bank’s asset purchase program were kept on hold in July’s meeting. August’s Inflation Report will give us more of steer on how the Committee views the risk to both inflation and growth and how confident the Bank is that spare capacity in the economy will bring inflation back to target.
It seems that a difficult balancing act will continue to face both companies and policy makers in the months ahead.
