By Max Clarke

The UK’s small and medium-sized manufacturers saw the volume of orders at home and abroad grow at the fastest rate in 16 years, leading to another solid rise in output, the CBI said today.

But the leading business group warned that smaller firms are being squeezed by intense cost pressures.

The CBI’s latest quarterly SME Trends Survey revealed that volumes of domestic and export orders among smaller firms rose at the fastest rate since April 1995. Of the 414 respondents, 39% reported a rise in the volume of domestic orders in the three months to April, and 23% a fall, giving a balance of +16%. For export orders, 37% said volumes increased, and 14% said they declined, giving a balance of +23%.

Strong demand at home and abroad, coupled with stock rebuilding, helped push up output further. A balance of +18% of firms said production rose, compared with +13% in the previous quarter.

With demand and output rising, a balance of +16% of firms increased their headcount, the fastest rate since January 1995.

But alongside strong growth, production costs have increased rapidly, weighing on profit margins. A balance of +53% of firms said average unit costs rose, the highest since October 2008 (+53%) with the rate of growth accelerating from already strong increases over the past year. That led to sharp rises in average domestic prices (+26%) and export prices (+31%), both in line with expectations. Domestic prices rose at the fastest rate since April 1995 (+32%), and export prices at the sharpest rate since the survey began in October 1988.

“Smaller manufacturers are enjoying strong demand for goods at home and abroad, underpinning robust growth in production. Lucy Armstrong,” said Chair of the CBI’s SME Council. “Headcount has increased for the third consecutive quarter as firms try to keep up with demand, and output is expected to rise again in the coming months.

“However,” cautioned Armstrong, “inflationary pressures remain a dark cloud, with rising oil and commodity prices pushing up the cost of production and eating into profit margins. Manufacturers have raised output prices rapidly to cope, and expect to continue doing so over the next quarter.”

Inflationary pressures show no sign of easing in the coming quarter, with firms expecting unit costs to increase sharply again (+52%), and both average domestic (+26%) and export price inflation (+21%) to remain strong.

Looking ahead, firms expect demand to continue to strengthen in the next quarter, though at a slower rate. While firms anticipate a similar rise in output (+16%), domestic (+9%) and export orders growth (+6%) are set to ease, although remaining well above long-run average rates.

But there is some evidence of tightening capacity pressures. While the rate of capacity utilisation remains close to the long-term average, 25% of firms cite plant capacity as a potential constraint on output over the next three months, the highest figure since October 1988 (25%).

Investment intentions are generally strong for the year ahead, and firms plan to spend more on plant and machinery (+10%), product & process innovation (+19%) and training and re-retraining (+10%).

Overall, a net 12% of firms are more optimistic about the general business situation compared to three months ago (+3%).