SME manufacturing activity grows at record pace, but concerns around skills and material shortages grow - CBI

SME manufacturing output grew at the fastest pace on record (since October 1988) in the three months to July, according to the CBI’s quarterly SME Trends Survey.

The survey of 234 SME manufacturing firms also saw the volume of total new orders increase at the quickest rate on record, reflecting a record rise in domestic orders and the quickest export orders growth since January 2019. Furthermore, employment numbers also grew at the strongest pace on record in the three months to July.

Business optimism growth among SMEs in the three months to July remained strong, despite slowing slightly on the previous quarter, while sentiment regarding export prospects stabilised, after five consecutive quarters of decline.

Looking ahead to the next three months, output volumes are expected to grow at a similarly strong rate. Total new orders are anticipated to increase at a slightly slower pace, reflecting a slightly slower domestic orders growth and steady export orders growth. Headcounts are also expected to increase at a similar pace.

Manufacturers’ investment intentions for plant & machinery improved to their strongest on record (since 1988), while firms expect to increase capital spending on training & retraining in the next 12 months (relative to the last 12) to the greatest degree since January 1997.

However, it’s clear that supply-side constraints on output are growing. The share of firms citing concerns about the availability of skilled labour as a factor likely to limit output was at a joint-record high, while the proportions citing other labour or materials/components remained close to their respective record highs.

SME manufacturers also continue to report severe cost and price pressures. Average costs rose at their quickest pace on record in the three months to July. Additionally, firms reported record domestic price growth, and the fastest increase in export prices in four years. Both costs and export price growth are expected to slow somewhat next quarter, while domestic price growth is anticipated to pick up further.

Alpesh Paleja, CBI Lead Economist, said:

“The economic recovery has given a significant boost to SME manufacturers, with firms reporting record growth in activity. Buoyant demand has led firms to kick-start their investment plans and increase headcounts. The outlook further ahead is also positive, as businesses expect activity to continue to grow strongly.

“However, mounting staff shortages, rising cost pressures, and shortages of raw materials due to supply chain disruptions are posing a real challenge to the outlook.

“It is vital that government now takes all measures to protect this revival in activity. Test and release could support the continued opening of this sector, and will help ward off further disruption, and vitally, keep our economy open.”

Key figures:

• Output volumes in the three months to July grew at the quickest pace on record (since 1988) (+36% from -3% in April). Output growth is expected to continue at a similar pace in the coming quarter (+35%).
• The share of firms citing orders or sales as a factor to limit output next quarter fell to its lowest on record (since 1988). However, the proportion citing skilled labour was at a joint-record high (33%) and the shares mentioning materials/components (46%) or other labour (15%) were just slightly under their respective records highs (of 47% and 16%, respectively).
• Total new orders in the three months to July (+46% from +11% in April) grew at the fastest pace on record (since 1988). Domestic orders also rose at a record rate (+41% from +9% in April), while export order growth was at its fastest since January 2019 (+15% from 0% in April)
• Manufacturers expect total new orders growth to slow slightly (+37%) over the coming quarter, reflecting expectations of a marginal deceleration in domestic orders growth (+36%) and of steady growth in export orders (+18%).
• Numbers employed in the last quarter grew at the fastest pace on record (since 1988) (+30% from +6% in April), with similar growth expected in the next three months (+27%)
• Business optimism in the three months to July grew at a slightly slower, but still strong, pace than last quarter (+31% from +35% in April, long-run average of -6%), whilst export optimism was flat after having fallen for five consecutive quarters (+1% from -6% in April)
• Manufacturer’s investment intentions for plant & machinery improved to their strongest on record (since 1988) (+25% from +21% in April). Firms expect to capital expenditure in buildings in the next 12 months (relative to the last 12) to be flat (+1% from +2% in April).
• Investment intentions for training & retraining improved to their strongest since January 1997 (+30% from +22% in April), while firms still expect to spend more on product & process innovation in the next year (+25% from +26% in April).
• Average costs in the three months to July rose at their quickest pace on record (since October 1988) (+68% from +49% in April). Costs growth is expected to slow somewhat next quarter, but remain strong (+49%).
• Domestic price growth in the three months to July was also at its fastest on record (since October 1988) (+35% from +21%) and export prices picked up at their quickest rate since July 2017 (+24%).
• Next quarter, domestic price growth is set to pick up further (+41%), while export prices are set to increase at a slower rate (+14%).