Growth in demand

Manufacturing output and total orders among smaller firms have risen at their fastest rate in over a decade, according to CBI research published this week.

The latest quarterly SME Trends Survey also shows the net balance of small firms increasing prices at a level not seen for about two years, as small and medium-sized enterprises (SMEs) are able to pass on some of the continued cost increases.

Much of the surprise growth in orders and output was driven by overseas demand among medium-sized manufacturers. But, although the quarter to January 2007 was particularly strong, businesses in the sector expect demand to slow down during the next three months.

Accordingly, business sentiment remains flat and significant job losses are expected over the coming quarter, particularly in medium-sized firms. Investment plans for buildings have been scaled back, but there has been a pickup in the expected spend on training and innovation.

Steve Sharratt, Chairman of the CBI’s SME Council, said: ‘Smaller businesses have recovered from a dip in October to deliver a very strong quarter. The growth in demand has also cut more manufacturers the slack they need to raise prices, restricting the impact on profit margins of the continued increases in costs.

‘2006 was a very mixed year for small and medium-sized businesses. The flat business sentiment, along with an expected slowdown in demand and job cuts, shows this volatility may continue.

‘Medium-sized firms do seem to be enjoying more favourable overseas demand, but all firms are more concerned that prices will constrain exports, particularly with the stronger pound.’??

Responding to the survey, 37 per cent of firms said that output had gone up in the past three months, while 18 per cent said it had fallen, giving a rounded balance of 18 per cent – the highest since July 1995 (+18%). This acceleration was stronger than the 12 per cent expected, but looking ahead, output is forecast to slow to a balance of six per cent.

The volume of total new orders increased over the three months, having been unchanged over the three months to October. But the growth in orders is set to slow over the coming quarter, in contrast to the broader picture given by the quarterly industrial trends survey, which includes bigger firms, where orders are set to continue growing.

The rise in average domestic prices is shown as a balance of 13 per cent, the highest since July 1995 (+16%). This is expected to accelerate further (a balance of 15%).

The price rises come against a background of high average unit cost growth. The past quarter saw these costs grow significantly (a balance of 32%) – at a similar rate to that seen throughout 2006. Cost growth is expected to continue over the coming quarter (+28%).

Business sentiment was barely unchanged compared with three months earlier (-1%). And job shedding is expected to increase over the coming quarter, (a balance of -11%), after a relatively stable three months (-3%).

Investment intentions are mixed. Companies plan to ease back on building spend (-18%) and plant and machinery (-6%) in the year ahead, although in the case of plant and machinery it will be a smaller planned cutback than seen in 2006. Conversely, spending on training and innovation is expected to be stepped up, with intentions in this area the most positive since January 2005.