Small firms lose confidence in economy

The Government will wake up to more economic woe this morning with Britain's leading business group reporting a sharp fall in sentiment among small manufacturers.

According to the CBI's quarterly trends survey of small- and medium-sized enterprises (SMEs), sentiment about the general business situation fell for the second consecutive quarter with a balance of -26 per cent of firms reporting that they were less optimistic than three months ago.

That is the sharpest fall in sentiment since April 2009 when the figure stood at -42 per cent. Sentiment about export prospects also deteriorated, standing at -19 per cent, which marks the first fall since April 2009.

Respondents are predicting a decline in production over the next three months and of the 412 firms that took part in the poll, 27 per cent said that domestic orders rose in the three months to October but 27 per cent said that they fell.

Worryingly, the resulting balance of 0 per cent was the lowest since January 2010, when it stood at -10 per cent. Over the same period, export orders fell (-8 per cent) for the first time since October 2009 (-13 per cent) and disappointed expectations of a modest increase (+8 per cent). In the next three months, firms expect a fall in domestic orders (-4 per cent) and little or no growth in export orders (+1 per cent).

Firms also expect to reduce their stock holdings in the coming quarter, with finished goods inventories in particular set to decline (-8 per cent). This follows continued stock-building over the past three months (+10 per cent), in anticipation of an improving economy, a hope that has now all but evaporated with the turmoil created by the sovereign debt crisis still gripping the global economy.

In line with expectations of stagnant orders and falling stocks, manufacturers expect output to fall over the coming quarter (-4 per cent). This follows modest growth in the three months to October (+6 per cent).

Lucy Armstrong, chair of the CBI's SME Council, said the news about exports was especially worrying: "Small and medium-sized manufacturers have seen domestic demand flat-lining in the past three months, and will have been particularly disappointed by an unexpected fall in export orders," Ms Armstrong said.

"Firms believe demand will remain flat in the coming quarter and they anticipate a small fall in production. As a result, sentiment has taken a real hit, falling at rates not seen since the height of the recession in April 2009."

One piece of good news in the latest figures is that firms increased their headcount (+16 per cent) for the fifth successive quarter. However, in line with expectations of weaker activity in the coming quarter, manufacturers are expecting only a modest increase in numbers employed (+4 per cent).