Increased market demand fuels robust SME growth

UK small and medium sized businesses continued to perform well during the third quarter with levels of business output and new business orders increasing at the sharpest rates since the middle of 2004, according to the PKF SME Index, a quarterly survey of 800 SMEs in the construction, manufacturing and service sectors.

Business output rose from 55.5 in Q2 to 56.1 while new business orders were up from 55.0 in Q2 to 56.0 (where marks above 50 indicate expansion and marks below 50 indicate contraction).

Of the three survey sectors, the construction sector again recorded the sharpest rate of growth at 57.5 – its best for a year - while business activity for SME manufacturers expanded for the fifth consecutive quarter.

The service sector also continued to record robust levels of business activity and new orders at 55.5 and 55.7 respectively. The reasons given by respondents for continuing growth include improved market conditions, increased customer demand and more effective marketing.

For the manufacturing sector, the reasons behind their sustained recovery include the end of the summer holidays, the ramp up for the Christmas season and a general increase in customer orders from the UK, USA, Europe and the Middle East.

For the service sector, growth is being generated by marketing campaigns implemented earlier in the year, 'sustained campaigns for bringing in new work', and the development of new marketing channels such as websites.

The level of employment rose for the 13th consecutive quarter at the same rate as in Q2 (52.9). All three sectors are hiring staff. Construction companies are recruiting either in anticipation of an increase in workload or to work on new projects. Manufacturers are taking on staff to cope with increasing volumes of new work and are also recruiting sales staff to sustain the pipeline of orders.

The picture for the UK SME economy was not all rosy, however, as input cost inflation rose at its fastest rate since Q4 2004 at 66.0. Although oil prices have fallen over the last few weeks, both the construction and manufacturing sectors paid more for many of their raw materials including steel, copper, polymers, glass and timber. Energy and utility bills, however, are still rising for all sectors while the service sector is also paying more on salaries and the cost of recruiting new staff.

To counter the impact of higher input costs, SMEs are increasingly putting up their prices to customers. Manufacturers are benefiting from the combination of stronger demand and lower capacity in some market segments while service companies are taking advantage of 'increased confidence in the general economy' to pass on their costs and raise their prices.

Across the UK, the best-performing region was the North of England where the rate of business activity accelerated to the highest since Q4 1999. Employment prospects in London & the South East were the best in the UK for the fifth consecutive quarter at 54.1.

PKF partner for growing business, Stuart Barnsdall, commenting on this quarter's survey results said: "It is very heartening to see that, in spite of the summer quarter traditionally being slow for manufacturers, all SME sectors in our survey are both busy and confident about market conditions."

"Although input costs were high for the quarter as a whole, the sharp fall in the price of oil during September has already had an impact on factory gate prices and both manufacturers and their customers have been benefiting from more competitive pricing over the last few weeks. The problem with apparent sustained growth in activity, however, is that the Bank of England becomes nervous about inflation so the next obstacle to overcome may be a rise in interest rates just at a time when business activity is ticking along well for SMEs."