Wednesday 25 January 2017 1:03 pm

Optimism at two-year high ahead of Brexit for UK manufacturers as domestic demand drives morale up

Chief City reporter covering banking, finance, economics and the City

Chief City reporter covering banking, finance, economics and the City

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A boom in domestic demand has boosted optimism among British manufacturers to increase at its fastest pace for two years ahead of Brexit, according to a survey of UK businesses.

More than a quarter of manufacturing firms are optimistic for prospects for the year ahead, according to the Confederation of British Industry (CBI), outweighing negative perceptions by the most since January 2015.

In the third quarter of 2016 businesses had been heavily pessimistic about prospects, but strong demand and a devalued pound have boosted manufacturers in particular.

Read more: UK manufacturing rose in November as the construction sector slowed

Domestic demand helped to drive the improvement in morale, with the volume of UK orders rising at its fastest rate since July 2014 in the three months to January. The strong demand reflects a healthy British economy, which has so far avoided any sign of a slowdown in the aftermath of the Brexit vote as consumers have continued to spend.

Almost a third of manufacturers said output has increased, while 37 per cent found total orders have increased.

The most apparent change to the UK economy so far has been the devaluation of sterling, which has boosted exporters as foreign buyers find their currency going further.

Manufacturers report export prices rising at an average of 16 per cent, well above the long-run trend of a nine per cent average decline. The survey found exports and export prices were expected to rise further.

The devaluation has also boosted competitiveness in EU and global markets.

Read more: Britain must look beyond trade deals to turbocharge exports

However, producer price inflation has risen, with a majority expecting further price rises in unit costs and therefore domestic prices. Producer price inflation in the UK has risen steadily since July, reaching 2.7 per cent in December.

Samuel Tombs, chief UK economist at Pantheon Macroeconomics, predicts factory gate prices to increase to around six per cent.

“We doubt that order books will look as healthy as they do now after manufacturers have increased their prices sharply,” he said.

However, with inflation yet to impact consumer demand, political concerns have been at the forefront for many businesses.

Sentiment measures have been dominated by concerns over uncertainty as the UK leaves the EU, but manufacturers have welcomed recent moves by the government to clarify a new industrial strategy

Rain Newton-Smith, CBI chief economist, said: “The new industrial strategy can support our manufacturing base by offering a shared long-term vision for the key sectors and regions of the economy and evidence-based plans for government and business collaboration. The CBI and its members across the country stand ready to support the government in achieving this.”