Manufacturers' confidence falls in Q3

LONDON (Reuters) - Manufacturers are braced for a sharp fall in orders and weaker profit margins as a stagnant economy takes its toll, a survey by the Engineering Employers Federation showed on Monday.

The EEF survey, which painted a surprisingly upbeat picture of the sector earlier this year, showed the balance of expected output and orders fell into negative territory in the third quarter for the first time since the end of 2002.

"Manufacturing has shown considerable resilience in the face of a credit crunch, a global economic slowdown and a massive increase in its costs. But there are now clear signs that these pressures are starting to take their toll," said EEF chief economist Steve Radley.

The output balance for the past three months remained in positive territory at +15, just one point lower than the second quarter's reading, but companies in all but a few niche sectors expected trading conditions to get tougher.

The output expectations balance fell to -5 from the previous quarter's reading of +15 and the expected domestic new orders balance fell to -14 from +3.

Price pressures also continued to rise, something that is likely to dismay Bank of England policymakers. The expected price balance for domestic orders rose from +18 to +25, the highest since the series began in 2001.

But the survey also showed that manufacturers were having their margins squeezed, as they could not fully pass on rising costs. The expected margins on domestic orders balance fell to -18 from -13 while that for export orders fell to -11 from -6.

(Editing by Peter Blackburn)