Business output and new orders for Midland SMEs continued to grow in the first quarter of 2006, despite the declining employment levels.

The findings form part of the quarterly SME Index by accountancy firm PKF, which surveys some 800 small and medium-sized businesses operating in manufacturing, construction and services.

According to PKF, business output continued to accelerate to 54.3 from 52.6 in the fourth quarter of 2005 - marks above 50 indicate an expansion.

The level of new business orders rose from 53.3 in 2005 to 55.

Anecdotal evidence from respondents also suggests that customer activity is increasing, PKF said.

Numerous references were made to a "major customer upturn", "UK demand picking up", "export orders higher than b udgeted" and "client confidence up".

Business activity in the manufacturing sector increased for the third consecutive quarter with output up from 53.1 in Q4 2005 to 54.2 - the highest level since the second quarter of 2004.

The level of new business orders also rose to 53.7, the highest score since the third quarter of 2004.

The three main factors identified by survey respondents for the uplift are stronger domestic demand, more export orders and aggressive selling.

Service sector output and new business growth also continued to accelerate to their highest levels since the third quarter of 2004 at 55.9 and 57 respectively.

Increased marketing and sales activity and a strong focus on new business were the main reasons behind service companies' good start to 2006, PKF said.

The only disappointing business performance indicator for the Midlands was employment levels, which fell for the fourth quarter running.

At 48.9, there was a slight uplift from the fourth quarter score of 47.5 but the region has now been the worst performing in the UK since the beginning of 2005.

All three SME sectors in the survey are now being seriously affected by the increase in energy costs. According to PKF, input costs continue to rocket at 61.8 - up from 59.3 in the fourth quarter of 2005.

This was particularly noticeable in the service sector, where the high cost of utilities is now a more cited reason than salaries and wages for rising input costs. According to a recent PKF energy survey, fuel costs rose for 92 per cent of SME respondents during the last 12 months by an average of 22 per cent, the firm said.

Toby Stephenson, PKF partner for growing business in Birmingham, said: "It is a shame that just as SMEs in the Midlands started to benefit from improved market conditions, the announcement of the closure of the Peugeot factory in Coventry throws a spanner into the works that will

exacerbate falling employment numbers. The spectre of rising energy costs is also not going to go away and the pressure to reduce energy costs and carbon emissions is rising.

"Energy efficiency is something that all businesses should review on an ongoing basis, continually seeking the most effective ways to curb the ever-increasing burden on both their costs and the environment." ..SUPL: