Manufacturing sector SMEs expect growth in next quarter despite dip in both domestic and expert orders, says CBI survey

Optimism remains for small and medium-sized enterprises (SMEs) in the UK's manufacturing sector as the falling value of sterling increases competitiveness to offset falling orders and output, according to latest research.

Manufacturers reported increased employment in the three months to April and they expect a modest increase in headcount in the coming quarter while both order books and production are expected to grow, according to the latest SME Trends survey from the Confederation of British Industry (CBI).

Falls in both domestic and export demand sparked a decrease in total new orders, disappointing firms' expectations that it would pick up, and output also fell for the fourth consecutive quarter.

Perhaps surprisingly, however, manufacturers expect output to grow slightly over the next three months.

They anticipate strong growth in export orders and predict that domestic orders will stabilise.

Confidence about the overall business situation has steadied, following three quarters of decline, despite weaker than expected activity.

Optimism about export prospects rose for the first time in a year after employment in the sector ticked up in the three months to April.

Manufacturers expect a modest increase in headcount in the coming quarter.

Figures for both domestic and export price inflation were broadly the same quarter-on-quarter.

But manufacturers' profit margins were once again squeezed as growth in average unit costs was the fastest since October 2011.

This pressure will persist as domestic prices are expected to rise only slightly in the coming quarter.

Exports are likely to be flat, against a backdrop of strong cost inflation.

With no sign of an improvement in credit conditions, investment plans for the year ahead are broadly unchanged.

Stephen Gifford, the CBI's director of economics, said it had been another disappointing quarter for SMEs.

They do, nevertheless, expect to raise output a little in the coming three months as the recent weakening in sterling will have boosted competitiveness.

Mr Gifford said conditions will remain challenging for the sector with little sign that credit conditions are improving.

Amid continued turbulence in the eurozone, fears about the impact of political and economic conditions abroad on export demand have heightened, he warned.

Copyright Press Association 2013