SME manufacturing output recorded virtually no growth during the last quarter and levels of new business are the lowest since Q2 2003, according to the 'PKF SME Index', a quarterly survey of 800 SMEs operating in the manufacturing, construction and service sectors.

Although the manufacturing sector recorded its 13th consecutive quarter of increased output, the increase in the first quarter was marginal at 50.5 (where scores above 50 indicate a rise on the previous quarter). Levels of new business also fell from 53.0 in Q4 2004 to 52.3 with respondents citing a variety of reasons including the relocation of customer factories to cheaper economies, a slow domestic market, and a downturn in orders from the railway and construction industries.

On the positive side, manufacturers whose order books are up cite strong export demand from the Far East and the USA, the release of public sector contracts, and the revival of the offshore market after a sustained period of high oil prices.

Employment within the sector has now fallen for the second quarter running (48.0). While some employers are continuing to recruit to meet increased production requirements, others are making staff redundant in small numbers.

Stuart Barnsdall, partner specialising in growing businesses at PKF, commenting on the SME Index findings, said: "SME manufacturers are clearly not having an easy time as they have to deal with a range of global pressures that are beyond their control. However, it is encouraging to see that export demand is up and that several companies are adopting the 'if you can't beat them, join them' approach by outsourcing some of their processes to low cost regions and increasing their purchasing from overseas suppliers.

"While this increasingly global approach to doing business will not have a positive impact on employment levels in the short term, it should help to ensure the longer-term prospects of the UK's manufacturing sector as a whole."

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