Friday, August 7, 2020

Sentiment worsens among SME manufacturers

New orders growth remained subdued among small and medium-sized (SME) manufacturers in the three months to January, with sentiment worsening notably further, according to the latest quarterly CBI SME Trends Survey.

The survey of 296 SME manufacturers reported that output grew at a pace above the long-run average in the three months to January, at a similar rate to the three months to October. But manufacturers expect only a slight rise in output over the coming quarter, and total orders are set to be flat.

Domestic orders rose only slightly in the three months to January, following flat volumes in the previous quarter, and they are expected to stagnate again in the next three months. Exports orders growth saw a more notable acceleration in the quarter to January, after a noticeable slowdown in the previous quarter, though remained below the highs seen in mid-2018.

Meanwhile, business optimism dropped for the second quarter in a row in January, with export sentiment falling at the fastest pace since the financial crisis. Additionally, manufacturers’ concerns that political and economic conditions abroad were likely to limit their future ability to obtain export orders rose to their highest level on record (since 1988).

Investment intentions for the coming year remained weak, with expenditure on buildings, plant & machinery, training, and innovation all expected to be lower in the year ahead.

Overall, capacity remains tight for manufacturers, with the proportion of firms working below capacity remaining below the long-run average. Concerns over restrictions to near-term output from the ability to source materials/components rose to a record high and worries over availability of skilled labour limiting investment in the year ahead remain elevated.

Alpesh Paleja, CBI Principal Economist, says: “Uncertainty in the domestic and global trading environment is clearly hitting manufacturing SMEs hard, with sentiment falling, concerns over political and economic conditions abroad spiking and investment plans still well down on the past year.

“To give the UK’s SME manufacturers some much-needed certainty, it is crucial that politicians now work together to break the Brexit deadlock. Firms will welcome that the majority of MPs oppose a no deal outcome, but rejecting no deal doesn’t provide certainty. A deal is vital for the future health of SME manufacturers, giving them the confidence to invest, grow and compete on the global stage.”

Key findings – three months to January:

  • 31% of small and medium enterprise (SME) manufacturers reported an increase in total new orders, and 23% said they decreased, giving a balance of +8%. New orders are expected to be flat (0%) over the coming quarter
  • 27% of firms said domestic orders increased and 23% said they decreased, giving a balance of +4%. Domestic orders are expected to decline (-5%) over the next three months
  • 34% of firms reported an increase in export orders and 17% said they fell, giving a rounded balance of +17%. Firms anticipate export orders will grow at a similar pace (+17%) next quarter
  • Political/economic conditions abroad as a factor likely to limit export orders (50%) rose to the highest on record (since October 1988), overtaking prices as the most cited factor for the first time since the EU referendum.
  • 32% of SME manufacturers said output increased and 16% said it decreased, giving a rounded balance of +17%. Growth is expected to slow next quarter (+4%).
  • 11% of firms said they were more optimistic regarding their business situation, while 37% said they were less optimistic, giving a balance of -26% – the sharpest deterioration since July 2016 (-44%). Optimism about export prospects for the year ahead also fell (-29%), at the fastest pace since April 2009 (-32%).
  • Numbers employed grew at a subdued pace, with 25% of firms saying they had seen growth in headcount and 18% saying they had seen a reduction, giving a balance of +7% from +8% in the three months to October.
  • SME manufacturers are planning to reduce investment across the board. In particular, plans for spending on plant & machinery (-22%) are at their weakest since July 2009 (-30%). SMEs also expect to reduce capital expenditure on buildings (-22%), training and retraining (-10%) and product and process innovation (-10%) over the next twelve months
  • Average unit cost growth eased (+24%) to its slowest since October 2016 but remained a little above its long-run average (+17%). Growth is set to pick up somewhat (+31%) over the next three months
  • Growth in both average domestic prices (+17%) and export prices (+15%) picked up in the three months to January, and they are both expected to accelerate further next quarter (+27% and +28% respectively).

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