By Claire West

Both domestic and export orders among the UK’s small and medium-sized manufacturers fell in the three months to October.

Production levels continued to contract modestly, while business sentiment deteriorated for the second consecutive quarter.

However, prospects for the coming quarter are somewhat better, with output expected to increase slightly and new orders expected to level off

The CBI’s latest quarterly SME Trends Survey, which had 362 respondents, showed that total new orders fell (a balance of -13%), reflecting declines in both domestic orders (-11%) and export orders (-21%), with the latter falling at the fastest pace since July 2009 (-32%).

While domestic orders are expected to be flat over the next quarter (-2%), demand for exports is expected to fall further, albeit at a much slower rate (-5%).

In line with current demand levels, output reduced modestly for the second quarter running (-9%), but is expected to grow slightly in the next three months (+5%). Furthermore, SMEs reported that numbers employed were broadly unchanged in the last quarter (+2%), following growth in July (+11%), with the expectation of a slight reduction over the next three months (-5%).

Unsurprisingly, the proportion of firms reporting that the levels of orders or sales was a factor likely to limit output over the next three months rose, compared with the previous quarter (74% - the highest percentage since January).

A balance of -12% said they were less optimistic about the business situation in the three months to October, a similar pace of deterioration in sentiment to the July survey (-13%). Optimism on export prospects for the year ahead also fell for the second quarter running (-18%).

Lucy Armstrong, Chair of the CBI’s SME Council, said:

“Small and medium-sized manufacturers will be disappointed by the slide in demand during this quarter. Production levels have fallen for the second quarter running and profit margins continue to be squeezed, as output price inflation fails to match growth in costs.

“There are some signs of improving prospects going forward, with firms expecting to increase output slightly in the next three months and more positive investment intentions. But, the economic climate clearly remains tough, with businesses exposed to subdued conditions both at home and in our major export markets.”

Firms’ investment intentions, although remaining negative, improved on the previous survey. Investment intentions for the next 12 months on both buildings (-6%) and plant and machinery (-3%) moved back above their long-run averages, against weaker outcomes last quarter (-20% buildings, -13% plant and machinery).

Elsewhere, average unit costs rose modestly again (+10%), although the rise remained markedly slower than that seen in the two years to mid-2012. However, costs growth continued to outpace domestic and export price inflation. Domestic output prices were stable (-1%), while export prices fell (-11%) broadly in line with expectations. Both are expected to be flat in the coming three months (+3% and 0%, respectively).