Sentiment stable and output falls while SME investment plans are scaled back
Sentiment among SME manufacturers was stable for a second successive quarter in July, though this represents a relative improvement compared with the sharp declines seen 2022 and in early 2023, according to the CBI’s latest SME Trends survey.
Output declined for a fourth successive quarter in the three months to July. Total new orders also fell moderately, though the volume of total orders books was stable at a level deemed “below normal”. Both output and new orders are expected to grow moderately in the three months to October.
Supply-side constraints to output continue to diminish, though the share of firms citing labour shortages as a limit on output over the next three months remained historically high, as did the share citing the availably materials or components. A rising share of SMEs (almost two-thirds) cited orders or sales as a constraint on output.
SMEs have scaled back investment plans. Capital expenditure on buildings and on plant & machinery is expected to fall in the year ahead, with rising shares citing the availability of internal finance and the cost of finance as factors likely to limit capex. Spending on product and process innovation is also expected to decline, while training expenditure will be held steady.
Ben Jones, CBI lead economist, said: “Sentiment among SME manufacturers remains subdued, with output and new orders falling over the last quarter. Worryingly, investment intentions for the year ahead have weakened across the board in the face of uncertain demand, persistent labour shortages and, increasingly, higher finance costs as interest rates rise.
“In a challenging environment for manufacturing investment, confidence-building measures have a big role to play, whether that’s scaling up Made Smarter into a national programme or providing clearer signals of intent over the UK’s response to the US Inflation Reduction Act and the EU’s Green Industrial Plan.”
Key findings:
- Business sentiment was broadly stable in the three months to July (balance of -2% from +2% in April). However, export optimism fell at a faster pace than the previous quarter (-21% from -9% in April)
- Output volumes fell in the quarter to July (balance of -12% from -5% in April) but are expected to rise over the next three months (+7%)
- Total new orders fell in the three months to July (balance of -9% from +2% in April) but are expected to rise in the next three months (+7%). Export orders also fell (-13% from +5% in April) and are expected to fall again in the next three months (-8%).
- Orders or sales were the most commonly cited factor likely to limit output in the next three months (65%, up from 61% in April).
- The share of firms citing a materials or components shortage was broadly similar to April (28% from 29%).
- The share of a shortage of skilled labour eased for the third consecutive quarter (27% from 35%).
- Growth in average costs per unit of output eased for the fifth consecutive quarter (balance of +49% from +61% in April) and are expected to slow again in next 3 months (+31%)
- Growth in domestic selling prices also slowed (balance of +18%, from +33% in April), while export prices fell for the first time since July 2020 (-4% from +31% in April). Both domestic (+12%) and export (+4%) selling prices are expected to rise next quarter.
- Numbers employed were broadly unchanged from the previous quarter (+1% from +8%). SMEs expect a modest rise in headcount in the next three months (+14%).
- Investment intentions for the year ahead weakened. SME manufacturers expect to reduce investment in product & process innovation (-5%, from +6%), in buildings (-6%, from -10%) and plant & machinery (-9%, from +2%). Investment in training & retraining is expected to be broadly stable (-2%, from +13%).
- The main constraint on investment was uncertainty about demand (cited by 43% of firms), followed by a shortage of internal finance and inadequate net returns (both cited by 25%). Meanwhile, the share of firms citing the cost of finance jumped to the highest figure in three years (21%) – excluding the pandemic period, this was the highest figure since 1991.
