SME manufacturers see domestic demand grow at fastest rate for a decade CBI

Small and medium-sized manufacturers have reported the highest rate of growth in domestic orders since 1997, and continue to enjoy firm demand overall, according to the CBI's latest quarterly SME survey.

These smaller (SME) manufacturers fared better over the last three months than the sector as a whole. Whereas manufacturers overall saw growth in orders fall back from April's peak, the balance of SME firms seeing total orders rise rather than fall remained steady at a net +12%.

At a +7% balance, the expansion in domestic orders was the strongest since January 1997. Meanwhile, output over the quarter rose at a marginally quicker pace than over the previous three months (a balance of +12%, up from up from +10%).

The survey, however, showed a contrast between small firms and medium-sized enterprises over the last quarter.

Small manufacturing firms reported a pick-up in the growth of output and total orders, and with these measures expected to remain comparitively robust over the next three months, they plan to hire at the strongest rate in ten years.

For a second consecutive survey, small firms plan to increase investment in plant and machinery over the coming year. These firmest intentions for a decade come as the highest proportion of firms since 1995 expects plant capacity to be a limiting factor to output.

Medium-sized manufacturers, meanwhile, saw their growth slow sharply in the April - July quarter after a bumper spring. The pace of expansion in total output decelerated from a net +33% of firms reporting growth to a much more modest +6%. Growth in orders eased from a +35% balance to a still reasonable +13%.

This made medium-sized firms more apprehensive, and although employment was stable over the last three months, they now expect it to fall. Investment intentions in buildings, plant and machinery have also been scaled back.

For the SME manufacturing sector as a whole, export orders dipped for the first time this year, and (at a balance of -3%) firms are now less optimistic about the outlook for the year ahead. Prices are still cited as by far the most significant factor limiting exports, but though the pound continued to strengthen between April and July, the percentage of firms reporting this has not changed.

The rise in average input costs has decelerated overall to its slowest rate in two years, driven by small firms, who have also enjoyed rising average domestic prices. For medium-sized companies, however, profit margins came under renewed pressure as they saw their costs rise (a balance of +24% said costs were higher than three months ago), while selling prices stayed broadly the same. Looking ahead, SMEs expect costs to continue rising at their current rate but their ability to increase prices is set to slow, possibly reflecting the impact of succcessive interest rate rises.

A shortage of labour is a growing issue for SMEs in the manufacturing sector. The highest proportion of respondents since 1989 said shortage of labour is likely to limit investment over the coming year.

Steve Sharratt, chairman of the CBI's SME Council said:

"Small and medium-sized manufacturers expected this to be a strong quarter, and it has been. Demand and output volumes showed robust growth, ahead of the manufacturing sector as a whole.

"SME firms are not complacent, and predict a tightening of profit margins in the coming quarter. Nevertheless, SMEs see this increase in business as providing the opportunity to invest further in product and process innovation in order to enhance both competitiveness and productivity.

"Labour shortage is an increasing constraint to expansion, and a lack of skilled labour is particularly likely to hamper small firms' ability to meet demand. Unsurprisingly, planned investment in training and retraining has been increased during 2007 to help tackle this."

The CBI SME Trends Survey was conducted between 21 June and 11 July 2007.

The total response was 535 manufacturing companies with fewer than 500 employees, of which 449 employed under 200 staff. 'Small' companies are defined as those employing fewer than 200, and 'medium-sized' as those with 200-499 staff.

The survey comprises a part of the CBI Quarterly Industrial Trends Survey, published on 24 July 2007.

SME manufacturers directly account for 2.4m jobs in the UK - around eight per cent of total employment - and contribute 200 billion to the UK economy.