Significant job losses are expected among small and medium sized manufacturers despite orders rising at their fastest rate for a decade, a survey has revealed.
Strong demand for their products has helped small and medium-sized enterprises to pass on their cost increases better than at any time in the last two years, according to CBI research published today.
The latest quarterly SME Trends Survey showed much of the surprise growth in orders and output was driven by overseas demand – especially in Europe and the US – among medium-sized manufacturers.
But, although the quarter to January 2007 was particularly strong, businesses expect demand to slow down during the next three months.
As a result business sentiment remains flat and significant job losses are expected over the coming quarter, particularly in medium-sized firms which employ 200-499 employees.
SME manufacturers directly account for 2.4 million jobs in the UK – around eight per cent of total employment - and contribute #200 billion to the UK economy.
Steve Sharratt, chairman of the CBI's SME Council, said: "Smaller businesses have recovered from a dip in October to deliver a very strong quarter.
"The growth in demand has also cut more manufacturers the slack they need to raise prices, restricting the impact on profit margins of the continued increases in costs.
"2006 was a very mixed year for small and medium-sized businesses. The flat business sentiment, along with an expected slowdown in demand and job cuts, shows this volatility may continue.
"Medium-sized firms do seem to be enjoying more favourable overseas demand, but all firms are more concerned that prices will constrain exports, particularly with the stronger pound."
Responding to the survey, 37 per cent of firms said that output had gone up in the past three months, while 18 per cent said it had fallen, giving a rounded balance of 18 per cent – the highest since July 1995 (+18).
But looking ahead, output is forecast to slow to a balance of six per cent.
The volume of new orders increased over the three months (to a positive balance of ten per cent of SMEs), having been unchanged (a zero balance) over the three months to October. But the growth in orders is set to slow in the coming quarter, the survey said.
The rise in average domestic prices is shown as a balance of 13 per cent - the highest since July 1995 (+16 per cent).
This is expected to accelerate further (a balance of 15 per cent) with increased pressure from interest rates, energy and raw materials prices raising costs for firms.
The past quarter saw these costs grow significantly (a balance of 32 per cent) - at a similar rate to that seen throughout 2006.
And job shedding is expected to increase over the coming quarter, (a balance of -11 per cent), after a relatively stable three months (-3 per cent).
Grey Denham, Midland chairman of the CBI, said: "There is more confidence around Midland manufacturers because we have lost some of the volatility associated with input prices.
"But as we move up the value chain, there will be more automation. By doing things more efficiently, this can result in reducing the number of jobs.
"Another message coming through though is that the local economy is buoyant enough for replacement jobs to be found, whether that be through other companies starting up, expanding or moving to this area."