SME manufacturing output fell for the first quarter since nthe end of 2001 and levels of new business are the lowest since Q3 2002, according to the PKF SME Index, a quarterly survey of 800 SMEs operating in the manufacturing, construction and service sectors.

Manufacturing output fell to 47.8 from 50.1 last quarter (where marks above 50 indicate expansion and marks below 50 indicate contraction), and employment levels contracted for the third consecutive quarter (48.3).

Levels of new business orders also fell to 48.9, the first time that the score had dipped below 50 since Q3 2002.

The PKF SME Index results mirror those from the Office for National Statistics which reveal that output in all of the UKs 13 manufacturing subsectors was lower in the three months to May than in the previous three month period. The sector now looks set for a recession defined as two consecutive quarters of falling demand.

Anecdotal evidence from survey respondents reveals a number of disparate factors including poor retail sales, customer de-stocking, the fallout from the Rover closure, the loss of work to low cost labour areas, the relocation of factories overseas, the slowdown of the housing market, and increasing customer caution and reluctance to make capital investment.

However, not all SME manufacturers are experiencing a slowdown. There appears to be strong export demand from China and the USA, and from the aerospace, oil and gas industries.

Employment within the sector has now fallen for the third quarter running (48.3) as companies struggling to reduce overheads do not replace staff who have left. Some employers are taking on temporary staff to cover seasonal peaks and staff holidays and a few are taking on new sales people tomaximise sales over competition.

Input costs continued to rise during the quarter but the rate of inflation was considerably reduced from 65.8 in Q1 to 54.0 in Q2. Steel and oil prices have fallen slightly and there has been some softening of the price of raw materials such as paper, resin, PVC, solvents and surfactants. The demand from China has also fallen slightly which has increased the availability of some raw materials.

Stuart Barnsdall, partner specialising in growing businesses at PKF, commenting on the SME Index findings, said: There are some glimmers of good news of export activity for SME manufacturers and the fall of sterling and the euro against the dollar could further boost export demand over the next few months. However, the underlying trend is one of contraction across all the survey indices with the phrase slowdown in market appearing countless times in the respondents anecdotal evidence. Manufacturers will be hoping for a cut in interest rates over the summer to help them in their battle to keep their heads above water.

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