SMEs see improved production with larger cost pressures

Smaller manufacturers saw production pick up in the three months to January, as domestic demand for UK-made goods improved, the CBI has said.

However, firms are now said to be facing strong cost pressures, which are feeding through to higher domestic and exported goods prices.

The CBI’s latest SME Trends Survey reveals that 30 per cent of the 366 respondents said the volume of output rose and 17 per cent reported a fall, giving a balance of +13 per cent. That was slightly weaker than expected but stronger than the balance of +9 per cent recorded in the previous quarter.

Output was lifted by an improvement in domestic orders growth, with 28 per cent of firms reporting a rise in volumes and 20 per cent a fall, giving a balance of +8 per cent.

Export orders also rose modestly, with 29 per cent of SMEs reporting a rise and 20 per cent a fall. The resulting balance of +9 per cent was down marginally on the previous quarter.

Cost pressures since early 2010 have weighed on profit margins and average unit costs increased sharply again, leading to a noticeable rise in average domestic prices and average export prices.

In the next quarter, firms expect unit costs to increase again (31 per cent) and domestic prices are predicted to rise even more sharply; the expected balance of +24 per cent is the highest since July 2008.

Meanwhile, a balance of +33 per cent of companies predict average export prices will head higher — the strongest expectation since January 1995, which was +38 per cent.

With domestic demand and output improving, a balance of +10 per cent of firms increased the numbers they employ — the fastest rate of growth since April 1995.

Looking to the coming quarter, firms expect production to rise again, with export orders expected to strengthen (+13 per cent), but domestic orders are set to see a slightly slower increase (+4 per cent).