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News - 27 May 2006
Looking up?

First signs of economic recovery in manufacturing

Small and medium-sized manufacturers are reporting signs of recovery as orders for goods stopped falling last quarter after more than a year of decline.

According to a recent CBI survey SME manufacturers also expect the volume of orders over the next three months to grow at the fastest rate for more than ten years and are the most optimistic about the general business situation for two years.These positive signs, however, must be tempered by the fact that high energy and oil prices continue to drive up unit costs, especially for small companies (those with fewer than 200 employees). This will more than outweigh the slight rise in factory gate prices and further squeeze profit margins.

Employment in the sector also continues to fall, particularly for small firms, the SME Trends Survey of manufacturers reveals, and companies have reined back their investment plans for buildings and plant & machinery.

Despite export orders continuing to fall, firms are marginally more optimistic about export prospects than last quarter and medium-sized firms actually expect orders to increase over the next three months.

Steve Sharratt, Chairman of the CBI's SME Council, said: "After years of tough conditions, smaller manufacturers are beginning to see some light at the end of the tunnel. However, the next few months is make or break time if this is not to prove to be yet another false dawn.

"It is therefore crucial that the Government pushes ahead with the deregulatory agenda. Market conditions are tough enough without the Government adding to the problems faced by UK businesses."

A balance of plus two per cent of SME manufacturers were more optimistic about the general business situation than three months ago, contrasting with a balance of minus 14 per cent in January, and the first positive reading since April 2004 (+14%). This was driven by medium sized companies (200-499 employees) who recorded a balance of plus nine compared to a flat zero for small firms.

A zero balance of SME manufacturers reported an increase in total new orders, an improvement from minus eight per cent in January. Over the next three months, a balance of plus 10 per cent of firms expect orders to grow. This would mark the strongest growth since 1995. Export orders fell however (a balance of -9%) although a balance of plus 4 per cent are optimistic about their export prospects.

Average unit costs continued to rise (a balance of 34% of manufacturers reported an increase) with small companies more affected than medium-sized ones. Average domestic prices rose in the three months to April (a balance of 7%) reversing the trend of the previous three quarters, and are expected to continue to increase.

SME manufacturers directly account for 2.4m jobs in the UK - around 8% of total employment - and contribute £200 billion to UK turnover.

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