By Claire West

Stronger demand and companies rebuilding stocks of goods helped boost production among the UK’s smaller manufacturers, according to a CBI survey. But the UK’s leading business group said that growth is likely to stall in the next three months in the face of weaker demand.

Of the 403 small and medium-sized manufacturers that responded to the CBI’s latest quarterly SME Trends Survey, 41% said output rose in the three months to July, while 20% said it fell. The resulting balance of +21% is the fastest growth since April 1995 (+25%), and an improvement on the previous quarter (+3%).

The rise in output was driven by strengthening demand at home and abroad. 37% of firms saw the volume of total new orders increase during the quarter, while 24% saw a decline, giving a balance of +13%. That is the fastest growth since July 1995 (+17%).

With demand improving, firms also started re-building stocks, which also contributed to the strong rise in production. Stocks of raw materials (+16%), work in progress (+8%) and finished goods (+9%) all increased during the quarter.

Russel Griggs, Chairman of the CBI’s SME Council, said:

“Smaller manufacturers enjoyed a bumper quarter with production ramped up to meet growing demand and to rebuild stocks.

“Exports are leading the charge, reflecting the pick-up in global trade and the relative weakness of sterling, but firms are still seeing their profit margins squeezed because of rising costs.

“Looking ahead, firms do not expect such strong growth to be sustained into the coming quarter. Output is expected to dip slightly as demand looks set to weaken.”

Average unit costs continued to rise during the quarter (+26%), but few firms passed on the costs to customers, with average domestic prices staying broadly flat (+2%) over the past three months.

Concerns over access to credit have eased during this quarter. Just 4% of firms cite credit or finance constraints as likely to limit export orders, compared with 12% in the previous quarter. This is now in line with the long-run average. Furthermore, 5% of firms say credit or finance are factors likely to act as a brake on output, also in line with the historic mean.

Headcount across the sector remained stable for the second consecutive quarter, and a net 3% of firms are more optimistic about general business prospects than three months ago, with the rise in sentiment having eased on the previous quarter (+14%).

Over the year ahead, firms plan to spend less on the amount they invest in buildings
(-23%), plant and machinery (-19%), and product and process innovation (-6%) compared to the past year. Spending on training and retraining is expected to be unchanged relative to the past year (-2%).

The CBI also announced that its quarterly SME Trends Survey has been reclassified and re-weighted to bring the data in line with the latest UK and European Commission official classification systems. This permits easy comparison with other economic indicators.