SME manufacturing output recovered slightly in Q3 to bring the sector back from the brink of a recession but there is little evidence of a sustained recovery, according to the PKF SME Index, a quarterly survey of 800 SMEs operating in the manufacturing, construction and service sectors.

Manufacturing output rose slightly from 48.0 in Q2 to 51.1 (where marks above 50 indicate expansion and marks below 50 indicate contraction) and the level of outstanding business continued to fall (42.3) as the smaller volume of incoming new work enables companies to clear backlogs. Levels of new business orders recovered slightly to 50.3 as the end of the summer holidays signalled the resumption of the back to business season leading up to Christmas.

For those manufacturers whose business output had increased over the previous quarter, the most commonly cited reason was seasonal pick up. However, those experiencing a fall in business activity noted a reduction in customer demand, lack of confidence in economic stability and ever-quietening trading conditions.

Employment within the sector fell for the fourth quarter running and is now at the lowest level recorded (47.2) since the beginning of 2003. While some manufacturers are taking on casual labour to handle the peak autumn season, the majority are adopting a natural wastage approach and are not replacing staff who leave.

Input costs continued to rise during the quarter (57.2), the most notable being those for oil, fuel and all oil-based raw materials. Manufacturers continued to fight a losing battle to pass on their increased costs to customers with a score of 50.8 for their ability to increase output prices, the lowest for two years. Survey respondents are largely unable to do this because of strong overseas competition and the need to win more work in a market where demand is lower than normal.

Stuart Barnsdall, partner specialising in growing businesses at PKF, commenting on the SME Index findings, said: Our research indicates that it is only traditional seasonality and a smattering of stronger export demand that is keeping the SME manufacturing sector from recession. The combination of continually rising input costs and the slump in retail sales is putting intense pressure on a sector already battered by overseas competition.

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