Growth slows as costs rise

A PKF Accountants and Business Advisers product story

Edited by the Manufacturingtalk editorial team Oct 19, 2004

The SME manufacturing sector continued to grow during the last quarter albeit at its slowest rate since Q2 2003, according to the "PKF SME Index".

The SME manufacturing sector continued to grow during the last quarter albeit at its slowest rate since Q2 2003, according to the "PKF SME Index", a quarterly survey of 800 SMEs operating in the manufacturing, construction and service sectors.

The manufacturing sector recorded its 11th consecutive quarter of increased output (54.1) and new business orders (52.9) (where scores above 50 indicate a rise on the previous quarter) with respondents citing a variety of reasons for continuing growth including increased customer demand, continuing global demand for capital equipment, higher export sales, and improved confidence from major customers.

One joyful manufacturer simply reported that orders were flooding in.

However, the continuing pressure on manufacturers is the inexorable escalation of input costs which reached their highest ever recorded level of 68.9.

The cost of steel is having the main impact but respondents also mentioned higher costs for a wide range of raw materials such as oil, plastics, feedstock, bearings, brass castings, resins, solvents and copper.

Manufacturers have managed to increase their prices to customers for four consecutive quarters.

However, the gap between their costs and the prices they can charge their customers is now at an all time high - 68.9 for input costs and 55.9 for output prices - which will have a negative impact on margins.

David Mellor, partner at PKF, commenting on the SME Index findings, said: "While it's good news that output and new business orders continue to improve for SME manufacturers, the widening gap between what they are paying for their raw materials and the prices that they can charge their customers does not bode well for sustainable profitability or competitiveness.

Manufacturers are trying hard to claw back their rising costs from their customers but they have to be careful to balance the benefits of recouping costs with the danger of losing competitiveness.