Mixed quarter for small and medium-sized factory firms

● Latest CBI report shows new orders gathered pace ● But firms point to continuing skills shortage concerns

Small and medium-sized manufacturers saw output and new orders gather pace in the three months to July, but labour and skills shortages are continuing to bite, a new CBI report reveals.

The business body’s latest snapshot of more than 300 firms shows that total new orders rose at their fastest pace since 1995, off the back of strong growth in both domestic and export orders.

Output also rose strongly over the past three months, but small and medium-sized manufacturers expect to see a “significant” slowing in the pace of growth for both production and orders over the coming quarter, with domestic orders likely to flatten out.

According to the quarterly SME Trends Survey, optimism about export prospects in the year ahead also rose at a much slower pace.

Investment intentions were a mixed bag. While businesses expect to increase spending on plant and machinery in the year ahead – with investment plans at their strongest in the survey’s history – investment on intangible areas such as product and process innovation and training is anticipated to fall at a pace “unseen since the financial crisis”, the CBI, which speaks on behalf of 190,000 businesses, warned.

Numbers employed again grew strongly, matching the record pace seen in the previous quarter. However, concerns over skill shortages intensified, with the number of firms citing skilled labour as a factor likely to limit output rising to its highest since 1988.

Pricing pressures also remained intense. Average unit costs growth remained elevated, and domestic prices also continued to rise strongly.

In the face of continuing cost pressures, firms have been stockpiling, with growth in stocks of both raw materials and work in progress the fastest on record.

Alpesh Paleja, CBI principal economist, said: “SME [small and medium-sized enterprise] manufacturers will be feeling buoyant after a period of strong growth in orders and production. But cost pressures remain stubbornly high, and the clouds of uncertainty are still looming large, as seen in the deterioration in firms’ plans for investment in ‘intangible’ areas.

“The retrenchment of training budgets is worrying at a time when skills and labour shortages are really biting hard, and highlights the need for urgent reform of the Apprenticeship Levy, so that it truly delivers for people and businesses.”

The quarterly survey was conducted between 26 June and 12 July, with a total of 324 UK SME manufacturing firms replying.

During the latest survey period, the pound averaged €1.13 and $1.32, while Brent Crude oil averaged $76 per barrel, compared with €1.15 and $1.41, and $67 per barrel in the April survey period.