Small and medium-sized businesses start to feel the pinch of inflation, survey shows

Average domestic prices, export prices and unit costs all rose at their fastest rate in six years during the first quarter of 2017

Overall UK manufacturing output—which accounts for around 10 per cent of the economy—expanded by just 0.5 per cent on the previous quarter in the first three months of 2017 (Reuters)

A survey of more than 370 small and medium-sized manufacturers has shown that new orders grew at their fastest rate in three years during the first quarter of 2017, but inflationary pressures are starting to bite.

The research, conducted by the Confederation of British Industry, showed that demand was driven by both domestic and export orders in the three months to April, but a weak pound since the Brexit vote lead to the strongest rises in unit costs and prices in six years.

“The UK’s SME manufacturers have hit a purple patch, with strong domestic and export demand driving a firm rise in output. But costs and prices have continued to climb, with little sign of let up over the next quarter,” said Alpesh Paleja, an economist at the CBI.

“This is putting considerable pressure on manufacturers’ margins, and so we’re likely to see further pass-through to consumer prices ahead,” he added.

A total of 38 per cent of businesses reported an increase in total orders, and 18 per cent a decrease, giving a net balance of 20 per cent increase, which is the highest since April 2014.

But average domestic prices, export prices and unit costs rose by 26 per cent, 28 per cent and 38 per cent respectively, all the fastest rate in six years.

SMEs are defined as those that employ fewer than 500 people.

Figures from the Office for National Statistics showed that the rate of inflation was at 2.3 per cent in March, which is the highest reading since 2013 and up from just 0.5 per cent a year ago.

The UK's GDP growth unexpectedly fell to 0.3 per cent in the first quarter of 2017, and manufacturing output – which accounts for around 10 per cent of the economy – expanded by just 0.5 per cent on the previous quarter, down from its 1.2 per cent surge in the fourth quarter of 2016.

In April, the CBI Industrial Trends survey showed that the net balance of firms planning increases in investing in plant and machinery in the second quarter of 2017 fell to minus 10 per cent, down from 5 per cent previously, and the lowest since the third quarter of 2011.