UK SME output volumes grew at a firm pace in the three months to January whilst costs growth remained at its record high, according to the latest CBI SME Trends Survey.

The survey of 218 SME manufacturers found that output growth picked up slightly from the previous quarter and is expected to grow at a broadly similar pace in the next three months.

However, average unit costs maintained their record pace of growth for the second quarter in a row, with expectations pointing to cost inflation picking up further in the next three months.

Record costs growth has continued to feed into heightened price pressures. Average domestic prices grew at a slightly slower – but still elevated – pace in the three months to January, while average export prices increased at a similar rate to last quarter’s record high. Manufacturers expect both domestic and export price growth to pick up in the next three months.

Total new orders grew strongly over the quarter to January, reflecting firm domestic orders growth and another small rise in export orders. SME manufacturers expect total new orders growth to slow over the next three months, primarily reflecting a deceleration in domestic orders growth. In contrast, export orders are expected to accelerate slightly.

Supply challenges are still expected to hamper activity going forward, with concerns over the availability of skilled labour, “other” labour, and materials/components as factors likely to limit output remaining heightened (despite softening somewhat on last quarter).

Meanwhile, investment intentions for tangible and intangible assets in the next 12 months (compared to the last 12 months) strengthened, despite a dip in business sentiment over the past quarter.

Alpesh Paleja, CBI Lead Economist, said: “It’s been a challenging start to the year for SME manufacturers, with record cost growth, supply chain disruption, and labour shortages all weighing on production. Despite these roadblocks, activity has remained firm, and businesses have stepped up their investment plans.

“The Government must continue to work with business to tackle immediate barriers to growth. They must also put forward more ambitious plans to incentivise investment, to boost the longer-term growth potential of the economy.”

Key findings:

• Output growth in the three months to January accelerated slightly (+19% from +14% in October, long-run average of 0). Similar growth is expected in the coming quarter (+16%).
• New orders growth in the three months to January sped up considerably (+42% from +24% in October), reflecting a jump in domestic orders (+43% from +24% in October). Export orders, meanwhile, grew at a similar pace to last quarter (+7% from +6% in October).
• Manufacturers expect total new orders growth to slow substantially in the coming quarter (+13%). Growth in domestic orders is expected to ease (+16%) whilst export orders (+11%) are expected to pick up.
• Numbers employed in the sector grew at a slower pace (+13% from +25% in October), but growth in headcount is expected to pick up (+33%) in the next three months.
• Business sentiment dipped in the quarter to January (-7% from -2% in October), with export optimism also worsening (-9% from -5% in October).
• Average unit costs in the three months to January grew at record-fast pace for the second quarter in a row (+76% unchanged from +76% in October). Costs growth is expected to accelerate further next quarter (+80%).
• Growth in domestic prices eased somewhat (+40% from +47% October), whilst export prices increased at a similar pace to last quarter’s record high (+33% from +34% in October). Both domestic (+65%) and export price growth (+43%) are expected to accelerate further in the coming quarter.
• The shares of firms citing concerns about the availability of materials/components (49% from 65% in October), skilled labour (36% from 46% in October), and “other” labour (23% from 25% in October) as factors likely to limit output in the coming quarter remained heightened, despite softening somewhat from last quarter.
• Firms expect to increase investment in buildings, plant & machinery, training & retraining, and product & process innovation in the next 12 months (compared to the last 12 months).
• 84% of respondents said they had sufficient capacity to at least meet demand, an improvement from last quarter’s record low (70%).