WIREDGOV

Business optimism has edged higher for the UK’s small and medium-sized (SME) manufacturers over the past quarter, and sentiment regarding export prospects for the year ahead has risen strongly, according to the latest CBI Quarterly SME trends survey.

The survey of 423 firms reported that total new orders edged up slightly in the three months to October, while output rose modestly. In particular, exports orders were flat on the quarter, but this marked the first time that they had not fallen since mid-2014. Robust growth in export orders is anticipated over the next three months, with expected growth the strongest since the data series began (in October 1988).

But while optimism about export prospects over the year ahead grew strongly – at the fastest pace since April 2014 - SME manufacturers reported that average unit costs at home are rising (at the fastest pace since April 2013) and are expected to continue to increase over the next three months.

Numbers employed have grown for the fourteenth consecutive quarter, but at the slowest pace in almost two years. Headcount is expected to be flat over the next three months.

Investment intentions have improved, following a deterioration in the wake of the referendum. Planned spending on buildings has moved above its long-run average,  while firms expect to keep expenditure on plant & machinery unchanged. However, concerns over labour shortages limiting capital spending have risen, to levels similar to those seen at the end of 2007.

Rain Newton-Smith, CBI Chief Economist, said:

“Smaller manufacturers are increasingly confident about their export prospects in the months ahead as they continue to reap benefits from the weaker Pound. But this is also leading to a rise in costs at home.

“While investment intentions have improved, uncertainty among businesses remains high, and so the Government must prioritise measures to ensure that firms keep investing ahead, like removing new plant and machinery spending from business rate calculations.

“Setting the right environment for firms to innovate must be at the heart of the Autumn Statement, so the Government should commit to a long-term target for R&D spending of 3% of GDP, getting behind Innovate UK and our catapult centres.”

Key findings – three months to October:

• 25% of small & medium sized enterprise (SME) manufacturers said they were more optimistic, while 21% said they were less optimistic, giving a balance of +4%
• 30% said their volume of output was up, and 21% said it was down, giving a rounded balance of +10%. Companies expect output to increase at a similar rate in the next quarter (+8%)
• 30% said their total new orders were up, while 26% said they were down, giving a balance of +4%. Firms expect a strengthening in orders growth next quarter (+13%)                      
• 29% of firms reported that average unit costs had risen, while 10% said they had fallen, leaving a rounded balance of +18%. This is the fastest pace of growth since April 2013 (+29%). Costs are expected to rise by an even faster rate next quarter (+23%)
• Firms were more optimistic about their exports prospects for the year ahead (+24%), with sentiment rising at the fastest pace since April 2014 (+26%). Export orders are expected to grow at the fastest pace in the survey’s history (since October 1988) over the next three months (+33%).
• The proportion of SME manufacturers citing concerns about political and economic conditions abroad as likely to limit export orders fell slightly (42%) compared with the last quarter (49%), but remains well above the long-run average (22%)
• 19% of small and medium-sized manufacturers are employing more people than three months ago, and 15% less – leaving a balance of +4%
• Plans for capital spending on both plant & machinery (-3%) and buildings (-9%) in the year ahead improved from the last quarter
• However, labour shortages as an expected limitation to investment have picked up: now cited by 15% of respondents. This is the highest since January 1989 (16%), but similar to the level seen at the end of 2007 (14% in October 2007).