A pause in recovery

Smaller manufacturers have seen the pace of recovery slow since the start of the summer, according to the latest CBI quarterly survey of small and medium-sized companies.

Smaller manufacturers have seen the pace of recovery slow since the start of the summer, according to the latest CBI quarterly survey of small and medium-sized companies (SMEs), published today.

Business optimism is broadly unchanged since three months ago, having improved at its fastest rate for two years in the previous survey, while orders have seen a marginal fall.

The past three months saw 30 per cent of companies saying new orders were up and 33 per cent saying they were down, a balance of minus three per cent. However, a balance of plus three per cent expect an increase in new orders during the next three months.

The CBI says the pause in growth could reflect the initial impact of higher interest rates in the UK, which have risen five times in eight months. There has also been a moderation in demand in previously fast-growing overseas markets, in particular the US. The overall volume of export orders in the past three months had a balance of minus six per cent.

Average unit costs for SMEs have risen for the eighteenth quarter in succession, with manufacturers of all sizes affected by rising oil and commodity prices.

SMEs found it difficult to pass on higher costs by increasing prices, with average domestic prices decreasing slightly overall, with a balance of minus three per cent. But a balance of plus three per cent is expected over the next three months, ending a seven-year decline.

And the CBI survey shows that there are further positive signs for the sector.

Numbers employed rose for the first time since January 1998, with a balance of plus six per cent of smaller manufacturers taking on more staff in the past three months. Expectations for numbers employed for the next three months are level, indicating that jobs created will not be lost.

Output increased at a similar pace to the last quarter. Although growth remains relatively modest, the balance of plus five per cent is the highest since January 1998. This compares with plus four per cent last quarter and minus 12 per cent a year ago. A balance of plus 11 per cent also expect output to increase over the next three months.

The proportion of firms working below capacity fell to 52 per cent, down from 60 per cent last quarter. This represents the lowest level since October 1997.

Hugh Morgan Williams, Chair of the CBI’s SME Council, said: “Although we have seen a slight pause in the recovery for smaller manufacturers, there are encouraging signs of a positive trend.

“Employment figures are up for the first time in six and a half years. The number of companies working below capacity has fallen to its lowest level for almost seven years.

“However, the recovery is fragile and has started from a low base after a long period of decline. There is no let up in cost pressures or in the strength of competition in the market, which both continue to squeeze margins.

“The peak in interest rates should not be much higher than the current level, and it is especially important to smaller manufacturers that the Bank of England does not apply the economic brakes too hard as the sector is more vulnerable than most.”

SMEs’ investment intentions remain weak for buildings and plant and machinery, with spending on these expected to be scaled back over the next 12 months.

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