By Daniel Hunter

Small and medium-sized manufacturers saw orders and output continue to fall in the three months to April, though firms are expecting both to grow in the next quarter, according to the CBI’s latest SME Trends survey.

This decrease in total new orders was driven by falls in both domestic and export demand, disappointing firms’ expectations that it would pick up.

Output also fell for the fourth consecutive quarter. However, manufacturers expect output to grow slightly over the next three months, on the back of strong predicted growth in export orders, while domestic orders look set to stabilise.

Despite weaker than expected activity, optimism about the overall business situation has steadied, following three quarters of decline. Meanwhile, optimism about export prospects rose for the first time in a year.

Employment in the sector ticked up in the three months to April, and manufacturers expect a modest increase in headcount in the coming quarter.

Elsewhere, both domestic and export price inflation were broadly the same quarter-on-quarter, but growth in average unit costs was the fastest since October 2011, squeezing manufacturers’ profit margins once again. Pressure on margins will persist in the coming quarter, with domestic prices expected to rise only slightly, and exports to be flat, against a backdrop of strong cost inflation.

Investment plans for the year ahead were broadly unchanged, with no sign of an improvement in credit conditions.

“It’s been another disappointing quarter for small and medium-sized manufacturing firms, who have seen new orders and output continue to fall," Stephen Gifford, CBI Director of Economics, said.

“Nonetheless, firms do expect to raise output a little in the coming three months. The recent weakening in Sterling will have boosted the competitiveness of the UK’s smaller manufacturing firms, with a strong pick-up in export orders predicted.

“But conditions will remain challenging for the sector. Fears about the impact of political and economic conditions abroad on export demand have risen and there is little sign in this survey that credit conditions are improving.”

Key findings:

- 23% of firms reported an increase in total orders and 37% said they decreased, giving a balance of -14%, disappointing expectations of growth (+9%) in the previous survey;

- The balance for domestic orders (-15%) was the lowest since January 2012 (-17%). However, while export orders also fell, the decline (-8%) was the slowest since July 2012 (-4%);

- Output fell for the fourth consecutive quarter (-5%);

- But manufacturers expect output (+12%) and export orders (+21%) to grow in the next three months, while a stabilisation in domestic orders is predicted (+3%);

- Sentiment about the general business situation was unchanged (0%), marking an end to three consecutive quarters of falling sentiment. Optimism about export prospects rose for the first time in a year (+8%);

- Numbers employed were steady (+3%), and a slight increase is expected in the coming quarter (+9%);

- Average domestic and export prices were broadly flat (-3% and -1% respectively). Average unit costs for manufacturers increased significantly (+29%) — the highest balance since October 2011 (+30%);

- Manufacturers expect to spend more over the next year on product and process innovation (+17%), with the balance at its highest in a year. However, investment intentions in other areas are broadly similar to the previous quarter: firms expect to spend a little more on training (+9%) and plant & machinery (+5%), but less on buildings (-15%) relative to the past twelve months;

- The proportion of manufacturers citing external finance as a likely constraint on capital spending in the year ahead rose to its highest level (12%) since October 2010.

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