Manufacturing (2)

The UK’s small and medium-sized (SME) manufacturers saw new orders grow at the fastest pace in two years, but there are stark signs of price pressures gathering steam, according to the latest CBI SME Trends Survey.

The survey of 422 SME manufacturers reported healthy growth in total new orders, underpinned by a strengthening in domestic demand – in contrast, exports rose at only a subdued pace. But firms expect new orders to continue to grow solidly again over the next quarter, with the outlook for both domestic and export demand upbeat.

Output continued to grow modestly, with firms anticipating an acceleration over the short-term. Meanwhile, headcount increased at a solid pace in the three months to January, and hiring intentions for the quarter ahead are firm.

Investment intentions for the year ahead showed further signs of stabilisation, following their sharp declines immediately following the EU referendum, with spending plans for both buildings and plant & machinery edging further above their long-run averages.

But pricing pressures are gaining traction, with average unit costs rising at the fastest pace since April 2011, and a further acceleration is expected over the next three months. Both domestic and export output prices were raised sharply, and firms plan on raising them even faster over the coming quarter: expectations for domestic price inflation were the highest since 1995 and for export price inflation, they were at a series high (since October 1988). Nonetheless, a record low proportion of respondents cited prices as being likely to limit export orders in the next three months.

Alpesh Paleja, CBI Principal Economist, said:

“Activity among SME manufacturers is ticking along nicely, with new orders growth reaching a two-year high. The pick-up was largely shouldered by domestic demand with exports yet to see any material boost from the weakness in sterling.

“But the lower pound is clearly stoking cost pressures, which in turn is pushing up factory gate prices. This will eventually feed through to prices at the till, so further rises in consumer price inflation are on the cards.

“Against this backdrop, smaller manufacturers will welcome the Government’s Industrial Strategy green paper, which recognises the importance of driving productivity growth across all sectors of the UK.”