SMEs face tough short-term prospects

Higher oil and energy prices have combined with falling demand and stagnating prices to make life tough for small and medium-sized manufacturers – and the CBI say many firms fear worse is yet to come.

However, a forward looking report from BDO Stoy Hayward, which looks ahead six months, indicated that there had been a slight rise in business optimism with a healthier looking UK economy in 2006. This indicates that businesses are expecting a "rebound" in 2006.

But trading conditions have deteriorated in each quarter of 2005 and the latest CBI SME Trends Survey, published on Monday showed that just one firm in eight is more optimistic about the business outlook than in July - one in three are more pessimistic.

The CBI survey found that in the three months to October, output fell for the third quarter in a row with just 20% of small and medium-sized manufacturers increasing production compared to 35% who saw it fall, a balance of minus 15%. Just under two thirds of firms are operating at less than full capacity.

Falling output, allied to higher oil and energy prices, pushed up average unit costs - a balance of 29% of firms reported an increase in the last quarter. This was despite employers shedding staff for the fifth successive quarter.

More job losses are expected next quarter, especially among medium-sized manufacturers (those with 200-499 employees) with a balance of 17% expecting to slim down the workforce compared to 9% for SME manufacturers as a whole.

At the same time, orders fell for the third successive quarter (a balance of 15% indicating a decline) as the ripples of the consumer spending slowdown spread into other areas of the economy.

The short-term CBI survey revealed that firms do not expect any improvement in the fourth quarter of 2005.

(SP/KMcA)