SMEs fear downturn

Small and medium-sized enterprises saw their output grow in the last three months of 2007 on the back of strong overseas orders, a CBI survey has shown.

However, these SMEs are pessimistic about the first quarter 2008. The fear is that the economic slowdown will hurt demand while rising input costs cut profit margins, noted the latest quarterly SME Trends survey.

The forecast by SMEs for Q1 2008 is for demand to slip slightly, with domestic orders anticipated to drop and overseas demand flattening. Four out of five firms - 78% - said a lack of orders is likely to limit output over the next three months. This is the highest since January 2006.

The CBI report said that rising input costs have continued to add pressure to profit margins. Nearly a third of SME manufacturers reported costs had gone up over the past quarter, and are expected to rise again.

A recent Office for National Statistics report noted the input prices measure of UK manufacturers’ materials and fuels rose 2.9%. This mainly reflected rises in the prices of crude oil.

Respondents to the CBI survey said they are reluctant to raise prices this year, although many will have to in order to meet rising costs. Increasing efficiency is still cited as the top reason for expected capital expenditure. Also, planned investment in product and process innovation is at its strongest level in a decade.

Despite economic uncertainty, SMEs expect employment to remain stable, although in the longer term jobs loses are foreseen.

Russel Griggs, chairman of the CBI's SME council, said: "Though smaller manufacturers enjoyed the best overseas demand in over twelve years last quarter, and last week's interest rate cut will provide some relief, uncertainty about the future 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."

The CBI survey consisted of 439 SMEs, all with fewer than 500 employees of which 367 firms employed under 200 staff.