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Optimism rises among smaller manufacturers but activity remains weak

Optimism rises among smaller manufacturers but activity remains weak

Optimism about the business situation rose among small and medium-sized manufacturers for the first time since April 2012, despite weak activity over the past quarter, according to the CBI's latest SME Trends Survey.

Total new orders continued to fall in the three months to July, once again disappointing expectations for growth. Domestic orders were static, while export orders were particularly disappointing, registering a fifth consecutive quarterly fall against expectations of strong growth.  The overall disappointment in demand was reflected by another slight fall in output.

Elsewhere, the pressure on margins eased somewhat as cost growth slowed, following a pick-up last quarter. However, it continues to run ahead of output price inflation.

Prospects for the quarter ahead are a little better, with output expected to stabilise and new orders expected to contract at a slower pace. Nevertheless, manufacturers have tempered their expectations for output growth in the quarter ahead to the lowest in a year, following successive disappointments. Meanwhile headcount is expected to fall slightly, following a year when headcount has been close to flat.

Investment plans for the year ahead are broadly unchanged, although both internal and external finance constraints eased a little. Optimism around export prospects for the next twelve months rose more slowly than in the previous quarter, as manufacturers remained concerned about political and economic conditions abroad.

Anna Leach, CBI Head of Economic Analysis, said: "Despite another disappointing quarter for small and medium-sized manufacturers, with output continuing to fall, optimism about the general business situation has risen for the first time since spring last year.

"Firms expect demand to improve both at home and abroad and production to stabilise over the next three months. But manufacturers remain concerned about the impact of political and economic conditions overseas on external demand, reflecting on-going uncertainty about the global economic outlook."

Key findings - three months to July: 5 August 2013

* 30% of firms reported an increase in total orders and 37% said they decreased, giving a balance of -7%, disappointing expectations of growth (+11%) in the previous survey;
* 27% of firms reported an increase in domestic orders and 30 % said they decreased, giving a balance of -2%;
* 22% of firms reported an increase in export orders and 26% said they decreased, giving a balance of -4%;
* Output fell for the fifth consecutive quarter (-6%);
* But manufacturers expect growth in total new orders (+9%), domestic orders (+5%) and export orders (+5%) in the next three months, while a stabilisation in output is predicted (+1%);
* Sentiment about the general business situation (+9%) rose for the first time since April 2012, while optimism about export prospects rose for the second consecutive quarter (+4%);
* Numbers employed grew slightly (+5%) but headcount is expected to decline slightly in the coming quarter (-4%);
* Average domestic and export prices were flat (+1% and +2% respectively). Average unit costs for manufacturers came down (+10%) following a spike in the previous quarter;
* Manufacturers' investment intentions are broadly similar to the previous quarter, spending less on buildings (-18%) and a little more on plant and machinery (+2%), product and process innovation (+15%) and training (+9%) relative to the past 12 months.

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George Bailey