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SME manufacturers see their domestic demand 'flatline' - having an impact on their recruitment prospects

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Sentiment has fallen sharply among the UK's small and medium-sized manufacturers, as firms predict a slight decline in production over the next three months, the CBI said today.

Of the 412 respondents to CBI's latest quarterly SME Trends Survey, published this morning 27% said in line with expectations of stagnant orders and falling stocks, manufacturers expect output to fall slightly over the coming quarter (-4%), following modest growth in the three months to October (+6%).

Firms increased their headcount (+16%) for the fifth successive quarter. However, in line with expectations of weaker activity in the coming quarter, manufacturers expect only a slight increase in numbers employed (+4%).

Sentiment about the general business situation fell for the second consecutive quarter. A balance of -26% of firms reported that they were less optimistic than three months ago, the sharpest fall in sentiment since April 2009 (-42%). Sentiment about export prospects also deteriorated (-19), marking the first fall since April 2009.

Lucy Armstrong, chair of the CBI's SME Council, said: "Small and medium-sized manufacturers have seen domestic demand flat-lining in the past three months, and will have been particularly disappointed by an unexpected fall in export orders.

"Firms believe demand will remain flat in the coming quarter and they anticipate a small fall in production. As a result, sentiment has taken a real hit, falling at rates not seen since the height of the recession in April 2009."

Investment intentions for the year ahead have not improved on the previous survey, with firms still planning to spend less on buildings (-20%) and plant and machinery (-9) relative to the previous twelve months. In particular, investment intentions for plant and machinery have remained negative for the second consecutive quarter.

Output price inflation moderated further this quarter. Domestic and export price inflation slowed (+10% and +6% respectively), but was still outpaced by a strong rise in average unit costs (+30%).

In the next three months, firms expect the rise in costs to moderate (+20%), but to still outstrip output price inflation. Domestic price inflation is set to ease further (+6%), while export prices are anticipated to continue rising only marginally (+7%).