By Claire West

Smaller manufacturers hope to ramp up production in the next three months as domestic demand is expected to strengthen, according to a CBI survey. It comes after output growth softened slightly in the three months to October, as the temporary boost provided by stock rebuilding faded.

Of the 382 respondents to the CBI’s SME Trends Survey, 31% expect output to rise in the next quarter, while 12% anticipate a fall, giving a balance of +19%. This compares with a balance of +9% in the past three months.

The rise in output is expected to be driven by improving domestic and overseas demand. In the next three months, 31% of SMEs expect the volume of total new orders to rise, and 18% expect them to fall, giving a balance of +14%. A balance of +9% firms reported total new orders went up in the past quarter.

Domestic orders are expected to pick up in the next three months (a balance of +10%), after stabilising during the three months to October (+2%). Export orders are expected to continue growing solidly in the coming quarter (+13%), compared to +11% in the October quarter.

Furthermore, SME manufacturers have increased their headcount. Numbers employed rose across the sector (a balance of +7%) at the fastest rate since April 2008 (+7%), but little change is expected in the next three months (-3%).

Looking at investment intentions in the coming year, firms plan to invest more on plant and machinery (a balance of +6%), product & process innovation (+10%), but less on buildings (-15%)

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

“Smaller manufacturers saw the pace of output growth slow slightly in the last three months after the fillip from stock rebuilding dwindled.

“But manufacturers expect a faster rise in production in the coming three months as demand at home strengthens.

“It is encouraging that firms have increased their headcount this quarter and are now planning to invest in plant and machinery, and innovation.”

After re-building stocks in the past quarter, inventories of work in progress (a balance of 0%) and finished goods (-1%) have stabilised, while stocks of raw materials saw a slower increase (+6%).

Profit margins remain under pressure, with average unit costs rising strongly again during the quarter (+31%) at the fastest rate since October 2008 (+53%). However, few firms are passing on the costs to customers, with average domestic prices staying broadly flat (-1%) for the third consecutive quarter.

Some SMEs are having problems accessing finance, with 12% citing external finance as likely to limit capital expenditure in the coming year. This has risen again after falling slightly in the past quarter. Meanwhile, 7% of firms say credit or finance is likely to limit output, once again edging higher in this quarter.

Russel Griggs added:

“As a new survey by the CBI and the Association of Chartered Certified Accountants (ACCA) shows, SMEs are turning to a wider pool of funding options to get the credit they need to grow their businesses, including trade credit. Banks remain an important source of finance, but there remains a lingering perception that applications will be refused.”