SME growth strong during last quarter of 2006

The robust performance of UK small and medium sized businesses in the third quarter of 2006 was almost replicated in the final quarter of the year with a broad based rise in SME activity, reports the PKF SME Index, a quarterly survey of 800 SMEs in the construction, manufacturing and service sectors.

Business activity across all sectors rose again in Q4 although it was not quite as marked as Q3's figure. The number recorded in Q4 was 55.8 (where marks above 50 indicate expansion and marks below 50 indicate contraction) while in Q3 it was 56.1. The increase of activity in Q4 was fuelled by the sharpest rate of new order growth in two and half years with the service sector seeing the largest increase of new business. The service sector's overall increase in business activity hit 57.2, the strongest increase seen since Q2 2004. In manufacturing, demand from new and existing clients meant a robust rise in new orders, while in construction, growth was the least marked for a year.

Regionally, Wales and the South West and London and the South East performed most strongly but growth was marked across the UK as a whole and remained above the long run series average. In the construction sector, many respondents cited the award of planning permission as an important reason for growth, while both manufacturing and the service sectors put it down to a seasonal increase in the run up to Christmas.

Input price inflation remained high in Q4, but the increase was not quite so marked compared to the rest of the year. In Q3 it was 65.8, while in Q4 it was 62.2. Again, the manufacturing sector blamed higher prices for raw materials, particularly steel, as well as the increase in the minimum wage. The higher wage bill also affected the service sectors.

Employment levels continued to increase for the 14th consecutive quarter. However, it was the first time since Q2 2005 that the rate of increase was below that for UK firms as a whole. Nonetheless, all sectors were hiring and the overall increase recorded was 52.3 for the quarter. The largest growth was in the service sector, reflecting the earlier figures of growth: the biggest seen for nearly two years. Manufacturing was a very close second and anecdotal evidence suggested this was down to new projects and increased orders. In construction, the figure actually fell this quarter and this was cited as mainly due to projects coming to completion.

PKF partner for growing business, Stuart Barnsdall, commenting on this quarter's survey results said: "In a quarter where the Bank of England raised interest rates for a second time and where our survey respondents nearly all commented on the continued increase in the price of raw materials, it is impressive to see that SMEs continue to perform strongly

"The service sector stood out in particular and, while a lot of this was down to the usual additional Christmas business, successful marketing campaigns and new sales procedures were also a factor.

"With interest rates expected to rise again however, it will be interesting to see what happens in Q1 2007."