Production picks up but small firms' costs are hit

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Small manufacturers are battling intense cost pressures which have been hitting margins even as production picks up, according to a survey by the Confederation of British Industry.

The CBI SME Trends poll shows that small manufacturers saw a shift in production in the three months to January, with 30 per cent of firms surveyed reporting a rise in output and only 17 per cent seeing a fall – a positive balance of 13 per cent. Although slightly weaker than expected, the figures are up on the previous quarter.

Lucy Armstrong, the chair of the CBI's SME council, said: "Manufacturing is one of the few bright spots in the economy and this survey underlines the important role of smaller firms in delivering growth and jobs."

Output was driven by an improvement in domestic order growth, with 28 per cent seeing a rise in local order volumes and 20 per cent seeing a fall – an overall positive balance of 8 per cent. Better demand and output meant that a positive balance of 10 per cent increased their headcount, the fastest rate of growth since April 1995.

Set against the upbeat figures is evidence of strong cost pressures, which have weighed on profit margins since early last year. Average unit costs were up by almost 30 per cent, leading to noticeable rises in average domestic prices, up by 6 per cent, and export prices, which rose by 9 per cent.

The data makes for worrying reading for the Bank of England, which must balance the need to keep inflation in check with the need to keep interest rates at a level that supports growth in the wider economy.

The survey of 366 firms also shows that further price rises are likely, with more than 30 per cent expecting unit costs to increase in the next quarter. Domestic prices are predicted to rise more sharply, with the expected balance at its highest level since July 2008. Meanwhile, 33 per cent are predicting rises in average export prices.

Ms Armstrong said: "Firms are increasing their headcount to keep up with demand, but smaller manufacturers are facing intense cost pressures and are being forced to pass these on to customers."