Small and medium-sized manufacturers saw their output grow in the last three months of 2007 on the back of strong overseas orders, a CBI survey shows today (Monday).
However firms are pessimistic about the present quarter as the economic slowdown is expected to dampen demand while rising input costs bite into profit margins.
The snapshot of the sector has been revealed by the latest quarterly SME Trends survey by the CBI, the UK's biggest business organisation.
Looking back over the three months to January, a balance of +10% of SME manufacturers said their output had grown - exceeding expectations in October.
The balance of firms reporting growth in export orders (+12%) was the strongest since October 1995 (+13%). This underpinned the unexpectedly healthy total order figure (a balance of +10%) as domestic demand remained fairly static.
This quarter, firms expect demand to slip slightly, with domestic orders anticipated to drop (a balance of -4%) and overseas demand to flatten.
Four out of five firms (78%) said a lack of orders is likely to limit output over the next three months. This is the highest since January 2006.
Rising input costs have continued to add pressure to companies' profit margins. A balance of +30% of SME manufacturers reported costs had gone up over the past quarter, and a balance of +29% expect them to rise again.
However, while firms were reluctant to respond with price rises over the course of 2007, a balance of +22% expect to do so in the coming quarter. This is the strongest since April 1995 (+30%). Small firms underpin this figure (+27%).
Increasing efficiency is still cited as the top reason for expected capital expenditure, and planned investment in product and process innovation is at its strongest level in a decade.
In spite of economic uncertainty ahead, small manufacturers expect employment to remain stable, and though a balance of 12% of medium-sized firms expect to cut jobs in the coming quarter, this is in line with the long term average.
Russel Griggs, Chairman of the CBI's SME Council, said:
"Though smaller manufacturers enjoyed the best overseas demand in over twelve years last quarter, and last week's interest rate cut will provide some relief, uncertainty about the future is growing across the sector.
"Firms, especially the smallest, are no longer able to absorb rising input costs and, even with fears of weakening demand, are now being forced to raise prices. This continued squeeze on profit margins means that product and process innovation is ever more important."
He added:
"Significant concerns about the capital gains tax system over the last quarter of 2007 have not been allayed by the government's adjustments to the reform, and with the economy is slowing across the UK and the wider world, confidence amongst SME manufacturers is low."
1. A balance is the difference between the percentage of manufacturers reporting an increase and those reporting a decrease.
2. The SME Survey was drawn from data from the January 2008 CBI Industrial Trends Survey, which was conducted between 13 December 2007 and 9 January 2008. The total response was 439 manufacturing companies with fewer than 500 employees, of which 367 employed under 200 staff.
3. During the survey period the pound averaged euro 1.32 and $1.99 while Brent Crude averaged $93.76 per barrel, compared with euro 1.44, $2.03 and $78.24 in the October survey period.
4. The CBI is the UK's leading business organisation, speaking for some 240,000 businesses that together employ around a third of the private sector workforce.
The organisation is also the UK's official business representative in the European Union, which generates more than 50 per cent of regulation affecting British firms.
With offices across the UK as well as in Brussels, Washington and Beijing, the CBI coordinates British business representation around the world.