SME manufacturing optimism growing considerably

According to the latest CBI quarterly SME Trends Survey, SME manufacturing output held flat in the three months to April but is expected to improve markedly in the coming quarter.

The survey of 260 SME manufacturing firms saw optimism grow considerably, at the fastest pace in seven years. Sentiment regarding export prospects continued to fall, although at a much slower pace than that seen over the past year.

The volume of total new orders grew, reflecting a rise in domestic orders, while export orders were flat. Employment numbers also ticked up in the three months to April, for the first time in two years.

Next quarter, output and domestic orders are expected to bounce back, with predictions for output growth at the strongest in the survey’s history (since 1988). However, export orders are set to decline.Investment intentions for the year ahead are also much improved. In particular, capital expenditure plans for plant and machinery turned positive for the first time since mid-2018 and are now at their strongest on record. Investment plans for training & retraining and product & process innovation also improved considerably, with the latter now at its strongest since October 1996.

However, inflationary pressure appears to be building. Average costs ramped up at the fastest pace in ten years, with domestic and export prices growth also picking up. Costs are set to increase further next quarter, and domestic price growth is expected to improve further.

Rising costs are in part linked to continued shortages of raw materials. The proportion of manufacturers citing materials or components as a factor likely to limit output over the next three months rose to the highest on record. Perhaps linked to this, stock building of raw materials also picked up.

Alpesh Paleja, CBI lead economist, said: “SME manufacturers are poised for strong growth and are sunnier in their outlook, consistent with the overall picture for the economy over Q2. But not all is rosy: companies clearly remain under the cosh, with cost pressures mounting and raw materials shortages persisting thanks to Covid-related supply chain disruption.

“As the end of the reopening roadmap hoves into view, manufacturers need clear guidance from government on the state of play beyond June, so they can plan, prepare and strengthen their supply chains – ensuring they can continue to operate safely and profitably.”