Material costs and growing economic uncertainty are casting a shadow over European manufacturers, a survey has found.
Boardroom confidence at the start of 2008 was at its lowest level for 2 1/2 years, according to business adviser KPMG.
The firm's latest Business Outlook Survey, which covers about 3,700 manufacturing companies across 11 European Union countries, showed a net fall in the net balance of those forecasting a rise in activity over the coming year.
The balance of plus 43.4 was "still within positive territory" but was well down on the high of plus 59.8 seen last July and was the lowest level since the summer of 2005, KPMG said. It does, however, show "some resilience in manufacturers' confidence given global economic headwinds".
There has been a similar fall in expectations for new orders. Although some 59 per cent of manufacturers questioned by KPMG predicted a rise in their order books, an increased proportion (17 per cent compared with 11 per cent last summer) are now expecting a fall. The net balance of plus 41.5 is also a 2 1/2-year low.
"The decline in confidence is inline with the weakening trend in manufacturing output since the summer," said Mel Egglenton, senior partner at KPMG in Birmingham.
"However, the survey suggests that, for the moment, manufacturers themselves think that the doom and gloom is somewhat overdone, as the net balances of activity, new orders, revenues and profits are still in positive territory.
"However, inflationary pressures remain at centre stage. With the data implying that both input and output prices are set to rise at their fastest rates for at least five years, further easing of monetary policy is likely to be gradual, rather than a series of aggressive cuts a la US."
Meanwhile, the prospects for small and medium-sized companies (SMEs) in the UK are beginning to deteriorate.
Strong levels of export orders boosted output among SMEs in the last quarter of 2007, according to report by the CBI today.
But a mood of pessimism has now set in, with the economic slowdown expected to dampen demand in the months ahead.
Companies are also predicting that rising input costs will bite into their profit margins, the latest CBI SME Trends survey reveals.
The country's biggest business organisation said its research showed that showed that most SMEs questioned feared a lack of orders would limit output in the next three months, while a growing number said they would have to increase prices.
Despite the economic uncertainty, however, bosses expected employment to remain stable.
Russel Griggs of the CBI said: "Though smaller manufacturers enjoyed the best overseas demand in over 12 years last quarter, and last week's interest rate cut will provide some relief, uncertainty is growing across the sector.
"Firms, especially the smallest, are no longer able to absorb rising input costs and, even with fears of weakening demand, are now being forced to raise prices. This continued squeeze on profit margins means that product and process innovation is ever more important.
"Significant concerns about the capital gains tax system over the last quarter of 2007 have not been allayed by the Government's adjustments to the reform and confidence amongst smaller manufacturers is low."