SMEs changing business plans as mood darkens

Many manufacturers expect to see no growth in demand and output over the coming quarter, and are changing their business plans, the CBI said today.

Of the 411 respondents to the CBI’s latest quarterly SME Trends Survey, 18 per cent of manufacturers reported that they are more optimistic than three months ago, and 28 per cent said they were less optimistic.

The resulting balance of -10 per cent marks the first significant decline in sentiment in two years.

The survey found widespread expectations that growth in activity will not hold up in the next three months.

Total orders rose strongly, a balance of +19 per cent, in the three months to July, and factory output continued to grow (+12 per cent) at a pace above the long-run average.

However, firms expect orders and production to be broadly unchanged over the next quarter (at +3 per cent and +2 per cent, respectively), and are reappraising their plans.

Andrew Palmer, the CBI’s Yorkshire & Humber Director, said: “Orders and production have been strong for the UK’s smaller manufacturers this quarter, but growth is expected to stagnate in the next, and sentiment has fallen for the first time in two years.

“Confidence has also been affected by global economic and political uncertainty over issues such as the euro crisis and the US debt ceiling.

“As a result, manufacturers are re-assessing their business plans. They do not expect to take on any more staff in the next three months and intend to invest less in the year ahead.”

Firms increased their headcount (+17 per cent for the fourth successive quarter, at the fastest rate since January 1995 (+17 per cent). However, with expectations of no growth in demand and output in the coming quarter, firms plan to keep numbers employed steady over the next three months (-2 per cent).

Investment intentions for the year ahead have weakened.

Firms are planning to spend less on plant and machinery relative to the previous twelve months (-8 per cent), with the survey balance turning negative for the first time in a year.

Fewer firms are planning to expand capacity, and significantly more firms plan to invest only in replacing existing capital in the year ahead, with this proportion (58 per cent) now the highest since the survey began in October 1988.

Cost and price inflation moderated considerably this quarter. Domestic and export price inflation slowed (+18 per cent and +14 per cent) from sharp spikes in April, and growth in unit costs also fell back (+34 per cent).

A further easing in domestic price inflation is expected in the next three months (+8 per cent).