By Daniel Hunter

Output has fallen among the UK’s small and medium-sized manufacturers, and sentiment has deteriorated, the CBI said today (Monday).

In the CBI’s latest quarterly SME Trends Survey, which had 359 respondents, 23% of manufacturers reported output volumes had increased in the three months to July, and 28% said they had fallen. The resulting balance of -5% is the first fall since October 2009 (-14%). However, firms expect output to be broadly flat in the coming quarter (+2%).

Export orders fell slightly in the quarter to July (-4%), while domestic orders were flat (+2%). Both export and domestic orders are expected to fall over the coming three months (balances of -12% and -5% respectively).

Alongside the deterioration in activity, optimism about the general business situation fell back (-13%), following a sharp improvement in the previous quarter.

Furthermore, investment intentions for the next twelve months also softened. Respondents plan to lower capital expenditure in the year ahead compared with the past twelve months, with investment intentions for plant and machinery (-13%) at their weakest in three years (-19% in July 2009), although only slightly below their long-run average (-9%).

“Challenging domestic conditions, continuing uncertainty over the Eurozone, and a broader loss of momentum in global growth, are clearly taking their toll on the UK’s smaller manufacturers," Lucy Armstrong, Chair of the CBI’s SME Council, said.

“Production has fallen over the last three months and sentiment has deteriorated, while growth in demand has stalled, with little improvement expected in the coming quarter.

“Nonetheless, smaller manufacturers have stuck by their plans to take on more staff — an increase in numbers employed is perhaps one of the few bright spots in an otherwise muted picture.”

Despite falling output and orders, SMEs increased headcount in the quarter to July (+11%), broadly in line with expectations (+16%), though they expect to hold off hiring in the next three months (0%).

Elsewhere, average unit cost inflation (+8%) eased significantly, and is now at its lowest since October 2009 (+3%). Manufacturers reduced domestic output prices slightly (-4%), while export prices were held steady (-1%) for the third consecutive quarter. Costs are expected to be flat in the coming three months, while output prices are expected to fall.

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