The UK manufacturing sector is showing signs of bouncing back from the fragile conditions seen at the end of 2011 and start of 2012, and sentiment has improved for the first time in a year, UK’s CBI reports.

Orders and output volumes showed modest increases in the three months to April, and momentum is expected to build further in the coming three months.

Of the 394 manufacturers responding to the latest CBI quarterly Industrial Trends Survey, 35% said that total orders rose, while 26% said that they fell. The resulting rounded balance of +8% shows that total orders increased modestly in the three months to April, returning to growth rates similar to those seen in the second half of 2011.

Output also showed modest growth in the quarter to April, with a balance of +5%.
The balance of firms reporting they were more optimistic about the general business situation than three months ago (+22%) was at its highest since April 2010 (+24%).
Looking ahead to the coming three months, manufacturers expect both output growth (+24%) and total orders growth (+24%) to strengthen further.

Ian McCafferty, CBI Chief Economic Adviser, said:
“With the acute fears over Europe and global demand subsiding somewhat since the start of 2012, sentiment about the general business situation has risen among manufacturers for the first time in a year.
“Firms have seen manufacturing demand and production picking up in the three months to April, and with expectations of a further strengthening in activity in the coming quarter, they’re increasing their stock-building and investment plans.
“Nevertheless, given Europe is still our biggest export market, the outlook for UK manufacturing will remain uncertain until the Eurozone crisis is resolved.”

In line with diminishing uncertainty about demand, firms plan to spend more over the next twelve months compared with the previous year on innovation (+30%), and training & retraining (+23%). These balances are at their strongest since October 1997 (+31%) and January 1998 (+27%) respectively.

The number of firms citing demand uncertainty as a limit on capital expenditure over the next twelve months has also fallen sharply, from 61% to 46%.
Investment intentions for plant & machinery (+13%) are positive for the first time in a year, and the strongest since July 1997 (+21%).

In keeping with strengthening output expectations, orders and sentiment, the past quarter has seen manufacturers stockpiling raw materials (+8%) and finished goods (+11%), while the balance for stocks of work in progress (+13%) is the strongest since July 1979 (+13%).

Firms expect to increase headcount in the coming three months (+16%), after an increase in numbers employed in the three months to April (+8%) for the seventh successive quarter.
Manufacturers’ domestic and export price inflation remained muted (balances of +7% and +4% respectively) and continued to be outpaced by the growth in average unit costs (+19%). However, the latter was at its weakest since January 2010 (+5%).

In the coming quarter, firms expect domestic and export prices to rise a little further (+7% and +2% respectively) while cost inflation is expected to decelerate once again (+10%).

This more optimistic analysis of UK’s manufacturing industries flies in the face of UK returning to a technical recession after the overall economy shrank -0.2% in the first three months of 2012, following negative growth of -0.3% in the final quarter 2011.

A sharp fall in construction output was behind the surprise contraction, the Office for National Statistics said.

The Q1 2012 figure is an early estimate and is subject to at least two further revisions in the coming months. It is compiled using 40% of the data gathered for later revisions.

UK was last in recession in 2009.