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UK manufacturing: is there a capacity constraint?

Posted on Tuesday, April 26, 2011 at 12:44PM by Registered CommenterSimon Ward | CommentsPost a Comment

The April CBI industrial trends survey signals that economic "rebalancing" is being hampered by a shortage of domestic manufacturing capacity, a conclusion also suggested by a Bank of England agents' investigation released last week. With firms struggling to keep pace with demand, the official policy of suppressing the exchange rate in order to stimulate manufacturing risks boosting inflation rather than economic growth.

The CBI survey reported a surprise surge in the percentage of manufacturers citing plant capacity as a constraint on output from 16% in January to 29% in April – the highest since 1988. The percentage working below a normal capacity level, meanwhile, fell to 55%, the lowest since July 2008 and slightly below the long-term average (of 56.5% since 1985) – see first chart.

Recruitment difficulties are also increasing: the percentage citing skilled labour availability as a constraint on output rose to 12% from 7% in January – second chart.

The implication that manufacturing is already running at full capacity tallies with a Bank of England agents' survey on imports, showing that firms have increased their use of imported inputs over the last three years despite sterling's depreciation, reflecting the relative cost and lack of availability of domestic substitutes.

With no slack, competitive pressures are weak, resulting in manufacturers passing through cost increases in full. The net percentage of CBI firms planning to raise prices reached 36% in April, the highest since 1990, suggesting a further pick-up in CPI goods inflation – third chart.

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