Domestic orders now driving growth for smaller manufacturers, CBI report reveals

Rain Newton-Smith, CBI Director of Economics

Rain Newton-Smith, CBI Director of Economics - Credit: Archant

Sales growth for Britain’s small and medium-sizes manufacturers is being driven by domestic demand rather than export orders, according to a new survey by the CBI employers’ organisation.

Small and medium-sized enterprises (SMEs) in the manufacturing sector have reported increased output over the last three months, alhough the rate of growth slowed compared with the previous quarter, the CBI’s latest SME Trends Survey shows.

And demand for the goods made by the 406 manufacturers surveyed was significantly stronger at home than abroad, with domestic orders rising for the fifth quarter in a row in the three months to October while export orders fell sharply, despite firms’ expectations for modest improvement.

However, the prospects for the next three months are better, with firms predicting that export orders will stabilise and domestic orders to continue to grow.

There was more good news on jobs, with numbers employed rising briskly for the third quarter in a row, and employment is expected to go on rising over the next three months, though at a slightly slower pace.

Fears that a lack of skilled workers will hold back firms’ ability to meet demand eased, although concern is still above its long-run average.

More than a quarter (26%) of SME manufacturers said they were more optimistic than three months ago, while 16% said they were less optimistic. The rounded balance of plus 9% is the weakest since July 2013.

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A similar proportion (28%) said their volume of output was up, and 19% said it was down, also giving a balance of plus 9%, which compares with plus 15% in the previous quarter.

More than a third (36%) said their domestic orders were up, while 22% said they were down, a balance of plus 14%, while less than one in eight (12%) said export orders rose over the past three months and 26% said they fell, leaving a rounded balance of minus 13% the weakest since October 2012.

The balance for expected export orders over the next three months was plus 4% and for expected domestic orders plus 17%.

Concerning jobs, 29% are employing more people than three months ago and 12% fewer, with the resulting balance of plus 17% comparing with plus 24% in the three months to July. The balance for employment expectations over the next three months is plus 10%

Nearly two-thirds (64%) of SME manufacturers said orders or sales would limit output over the next three months while 19% cited skills shortages.

Average unit costs and domestic prices were both broadly flat over the three months to October at plus 3% and minus 3%, respectively. Export prices fell slightly more than expected, at minus 8%, but are expected to be broadly stable (minus 3%) in the three months to January.

Rain Newton-Smith, the CBI’s director of economics, said: “It’s reassuring to see smaller manufacturers sharing in the continuing recovery, with optimism, output and jobs all rising over the last three months. Sales in the strengthening UK market are looking good but firms are finding export orders much harder to secure.

“International political instability and weak growth in the Eurozone is holding back overseas demand. But, sentiment is still improving and firms expect overall orders and output to expand at a healthier pace over the next three months.”