Cost of making goods in the UK rise sharply

Britain's small and medium sized (SMEs) manufacturing firms faced the sharpest drop in optimism in the quarter to April since the onset of the pandemic as new orders growth weakened.

The latest Confederation of British Industry (CBI) SME Trends survey showed a record-high growth in both costs and prices in the sector as headcount growth picked up pace.

Business optimism fell at the sharpest pace since the three months to April 2020 to -36% from -7% in January, with export optimism also falling sharply (-25% from -9% in January).

Average unit costs grew at the fastest rate since the CBI started collecting data in October 1988 to 90% from 76% in January, and domestic prices reached 60% from 40% in January.

According to the report, new orders rose at a slower pace in the three months to April compared with January — to 22% from 42%. 3% of 234 manufacturers expect broadly no growth in the next quarter.

Output volumes expanded at an above average rate during the time period, similar to January (balance of +16% from +19%), but growth is expected to slow in the coming three months (+10%).

The percentage of SME manufacturers believing that materials or components shortages will limit output in the next quarter reached a survey record high in April of 71% from 49% in January.

Read more: UK private firms face supply chain crunch despite steady growth

Meanwhile, employment in the sector picked up at a quicker rate than in the quarter to January (+21% compared to +13%), with SMEs expecting this to improve again in the next three months (+26%).

Ben Jones, lead economist at CBI, said: "It is no surprise that SME manufacturers are feeling less optimistic this quarter.

"Growth in new orders is expected to come to a halt over the next three months, cost growth is historically strong and concerns over materials shortages continue to rise. This is leading to unprecedented price rises and a hit to investment plans.

Read more: UK factories hike prices at record pace as inflation bites

The group hailed the extension of support for energy-intensive firms last week, calling it a "welcome first step for helping businesses through a difficult period, building greater resilience in the economy".

However, it called for more action to help keep SMEs’ investment plans on track, calling for a "permanent successor" to the super deduction.

Investment intentions for the year ahead weakened across the board compared with January, with those in buildings falling to 0% from +8%, plant and machinery (+17% from +20%) product & process innovation (+13% from +24%) and training (+15% from +25%).

A separate analysis from S&P Global showed UK manufacturers hiked their prices at the fastest rate on record last month as inflation raised costs, with 61% of firms raising prices and less than 1% cutting them.

Watch: How does inflation affect interest rates?