Small manufacturers predict tougher times ahead

November 7, 2011

Sentiment has fallen sharply among the UK’s small and medium-sized manufacturers, the CBI said today, adding to the air of gloom hanging over the economy.

A slight decline in production over the next three months is forecast by these firms while, worryingly, over the past three months they suffered a 8% fall in export orders. The Government has said it expects the recovery to be led by manufacturers and exporters. It is the first reduction in exports since October 2009.

And there is likely to be more bad news on job creation. While small and medium-sized manufacturers increased their staffing levels by 16%, the fifth successive quarterly increase, they expect only a slight increase in numbers employed (+4%) during the coming quarter,

Of the 412 respondents to the CBI’s latest quarterly SME Trends Survey, 27% said that domestic orders rose in the three months to October and 27% said that they fell – the resulting balance of 0% was the lowest since January 2010 (-10%).

In the next three months, firms expect a slight fall in domestic orders (-4%) and virtually no growth in export orders (+1%).

Firms also expect to reduce their stock holdings in the coming quarter, with finished goods inventories in particular set to fall (-8%). However, this follows continued stock-building over the past three months (+10).

In line with expectations of stagnant orders and falling stocks, manufacturers expect output to fall slightly over the coming quarter (-4%), following modest growth in the three months to October (+6%).

Sentiment about the general business situation fell for the second consecutive quarter. A balance of -26% of firms reported that they were less optimistic than three months ago, the sharpest fall in sentiment since April 2009 (-42%). Sentiment about export prospects also deteriorated (-19%), marking the first fall since April 2009.

Lucy Armstrong, chair of the CBI’s SME Council, said: “Small and medium-sized manufacturers have seen domestic demand flat-lining in the past three months, and will have been particularly disappointed by an unexpected fall in export orders.

“Firms believe demand will remain flat in the coming quarter and they anticipate a small fall in production. As a result, sentiment has taken a real hit, falling at rates not seen since the height of the recession in April 2009.”

Investment intentions for the year ahead have not improved on the previous survey, with firms still planning to spend less on buildings (-20%) and plant and machinery (-9%) relative to the previous 12 months. In particular, investment intentions for plant and machinery have remained negative for the second consecutive quarter.

Output price inflation moderated further this quarter. Domestic and export price inflation slowed (+10% and +6% respectively), but was still outpaced by a strong rise in average unit costs (+30%).

In the next three months, firms expect the rise in costs to moderate (+20%), but to still outstrip output price inflation. Domestic price inflation is set to ease further (+6%), while export prices are anticipated to continue rising only marginally (+7%).



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