Oil puts SMEs on the skids

In-Depth

The sustained high price of oil is forcing up costs for smaller manufacturers while their selling prices are held down by weak consumer demand, according to the CBI's latest quarterly SME Trends Survey.

Thirty-nine per cent of employers said average unit costs rose quarter-on-quarter for the last three months of 2005 compared to only 11 per cent who reported a fall, a balance of plus 28 per cent.

This balance is five points higher than for all manufacturers (+23%), suggesting smaller firms are being hurt more by higher oil prices, through energy and raw material costs, than bigger ones.

At the same time domestic orders fell last quarter, indicated by a balance of minus 16 per cent, and prices dropped with medium-sized companies faring slightly worse (-7%) than small firms (-3%).

Overseas orders fell too (a balance of -8%) with high export prices cited as a restraining factor on orders by 65 per cent of smaller manufacturers, even though they have been consistently falling.

Against this backdrop employers are not optimistic about the general business situation (a balance of -14%) although they are hopeful that orders will pick up next quarter (a balance of +7%).

Total volume of output last quarter remained broadly stable and is not expected to change in the next three months. Three-fifths of firms are working below capacity.

To offset rising costs companies have laid off staff. Medium-sized companies have borne the brunt of the job losses (a balance of -20% compared to the aggregate SME balance of -11%). This is expected to continue next quarter (aggregate balance of -9%, worsening to -24% for medium-sized companies).

Planned investment in buildings and plant & machinery over the coming year has been reduced, however spending on product & process innovation and training and retraining is forecast to rise.

The factor most likely to limit spending remains uncertainty about demand although inadequate net return and internal finance shortage continue to grow as constraining factors.

SME manufacturers directly account for 2.4m jobs in the UK - around eight per cent of total employment - and contribute £200 billion to UK turnover.

Manufacturers are facing the biggest squeeze between input and output prices for 30 years because of rising oil and gas prices which they have been unable to pass on to customers, the Office of National Statistics said in January.