By Daniel Hunter

Small and medium-sized manufacturers (SMEs) saw domestic and export orders continue to fall in the three months to January, while production also contracted for the third consecutive quarter. However, both domestic orders and output are expected to increase in the coming three months.

The CBI’s latest quarterly SME Trends Survey, which had 347 respondents, showed that total new orders fell slightly (-5%), for the second quarter running. This was driven by falls in both domestic orders (-6%) and export orders (-9%), although both declined at a slower pace than the previous quarter (domestic orders by -11%, and exports orders by -21%).

However, SMEs expect total new orders to grow over the next three months (+9%), likely to be driven by anticipated growth in domestic orders (+10%), in contrast, export demand is expected to be broadly flat (-2%).

In line with falling demand this quarter, output continued to fall (-8%), failing to meet expectations of modest growth (+5%). However, once again, production is expected to increase next quarter (+7%).

With less activity over the last three months, numbers employed in the sector fell slightly (-4%), for the first time in three years. But SMEs anticipate an increase in headcount in the next quarter (+11%).

“Activity has continued to contract this quarter, with falling production disappointing growth expectations," Anna Leach, CBI Head of Economic Analysis, said.

“Nonetheless, better news on the domestic front is expected, with output and domestic orders set to rise modestly. But there is little sign of improvement in export prospects, and uncertainty over demand continues to weigh on investment plans.”

SMEs remain concerned about export prospects for the year ahead with optimism falling significantly (-22%), at the fastest pace since April 2009 (-32%).

However, sentiment overall deteriorated at a slower pace: a balance of -6% said they were less optimistic regarding the business situation in the three months to January, with the rate of decline easing compared with the previous two quarters (July -13%, October -12%).

Furthermore, firms’ plant and machinery investment intentions for the year ahead turned positive (+4%) for the first time since April 2012 (+13%). However, more firms believed that uncertainty over demand would limit capital spending, cited by 64%, the highest since April 2009 (70%).

Elsewhere, average unit costs continued to rise only modestly (+10%), at a significantly slower rate compared with that in the two years to mid-2012. But although average prices were flat domestically (-1) and continued to fall in export markets (-5), output price inflation is set to pick up significantly in the coming three months (domestic +14, export +8).

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