Sentiment among SME manufacturers deteriorated sharply in October relative to three months earlier, according to the CBI’s latest SME Trends survey.

Output volumes stabilised in the three months to October, following four successive quarters of decline, and volumes are expected to rise moderately over the next three months. However, total new orders flat-lined over the three months to October and are expected to remain unchanged in the next three months.

Against this backdrop, SMEs plan to cut investment in buildings and plant & machinery over the year ahead, with around half of respondents citing demand uncertainty as a constraint on capital spending. Investment in innovation is expected to be stable, while spending on training and retraining is expected to increase only slightly.

Costs and price pressures have reduced significantly. The pace of growth in average costs per unit of output eased for the sixth consecutive quarter, but remain elevated. The pace of growth in domestic prices also slowed to its weakest in three years, while export selling prices were unchanged.

Ben Jones, CBI Lead Economist, said: “A mood of caution appears to have descended upon SME manufacturers, with domestic orders expected to stall and export orders to drop sharply."

“Although firms continue to expect higher output in the near term, rising demand uncertainty is increasingly weighing on investment decisions for the year ahead."

“The Chancellor can do his bit to inject more clarity into the environment for future investment by using the forthcoming Autumn Statement to announce he is making full expensing permanent.”

The survey, based on the responses of 242 SME manufacturing firms, found:

• Business sentiment deteriorated sharply in the three months to October (balance of -17% from -2% in July). Export optimism deteriorated at a similar pace to the previous quarter (-22% from -21% in July)
  

• Output volumes were broadly unchanged in the quarter to October (balance of +2% from -12% in July) but are expected to rise over the next three months (+9%)
  

• Orders or sales were the most commonly cited factor likely to limit output in the next three months (64%, broadly equivalent to 65% in July).
  

• The share of firms citing a materials or components shortage has eased for the sixth consecutive quarter (to 26%, broadly equivalent to 28% in July)
  

• The share citing a shortage of skilled labour increased (to 36% from 27% in July) and stands well above the long run average (+17%).
  

• The share citing credit or finance as a likely limit on output jumped through the quarter (+9% from +5% in July, and the highest since October 2009 – if you exclude the pandemic period).
  

• Total new orders were unchanged in the three months to October (balance of +1% from -9% in July) and are expected to remain unchanged in the next three months (0%). Export orders were also unchanged (0% from -13% in July) but are expected to fall sharply in the next three months (-20%).
  

• Growth in average costs per unit of output eased for the sixth consecutive quarter (balance of +30% from +49% in July) and costs are expected to rise at a similar pace over the next 3 months (+32%)
  

• Growth in domestic selling prices also slowed (balance of +7%, from +18% in July), while export prices were unchanged in the quarter (0% from -4% in July). Both domestic (+10%) and export (+10%) selling prices are expected to rise next quarter.
  

• Numbers employed fell for the first time in three years (-7% from +1%). SMEs expect a modest rise in headcount in the next three months (+10%).
  

• Investment intentions for the year ahead were mixed. SME manufacturers expect to reduce investment in buildings (-22%, from -6%) and plant & machinery (-10%, from -9%). Investment in training & retraining (+6%, from -2%) and product & process innovation (+3%, from -5%) is expected to rise.
  

• The main constraint on investment was uncertainty about demand (cited by 52% of firms, from 43%), followed by inadequate net returns (24%). Meanwhile, the share of firms citing a shortage of labour eased (to 20%) its lowest since April 2021.