The NatWest UK SME Business Activity Index for manufacturing, which tracks month-on-month changes in SME output, registered a score of 49.6 in September, down from 54.3 in August. This shift signalled a slight contraction in manufacturing output for SMEs. The index, a crucial barometer for the sector, suggests that a reading above 50.0 indicates expansion, while one below 50.0 signals contraction.

After a brief period of growth in August, production volumes for SMEs fell in September. Respondents cited shrinking order books and weakened demand both domestically and overseas as primary reasons for the downturn. This marked the fourth consecutive month of falling new orders.

Employment levels in the sector also continued to contract, with firms opting not to replace departing employees. Elevated wage costs were among the reasons given for this cautious approach, though the rate of job cuts was modest.

Confidence remains despite challenges

Despite current setbacks, SME manufacturers retained a positive outlook for the next 12 months, driven by plans for new product launches, enhanced marketing strategies, and long-term growth initiatives. However, optimism, while present, dipped to its lowest level for the year so far, reflecting broader concerns within the manufacturing sector.

Cost pressures ease slightly

On the cost front, SMEs reported a rise in operating expenses, with panellists noting increased shipping, energy, and raw material prices, exacerbated by supply chain constraints. Packaging costs, particularly for paper and cardboard, also climbed. However, the rate of inflation slowed to its lowest level since March, and SME manufacturers faced lower cost pressures compared to the wider manufacturing sector.

To offset rising costs, some manufacturers raised their prices, though the increase in selling prices was modest and the slowest since May.

Laura Capper, Head of Construction and Manufacturing at NatWest comments: “While the drop in output and new orders is certainly a challenge for SME manufacturers, it’s encouraging to see that the reduction in staffing remains modest, and confidence in future growth remains. The focus on new product launches and strategic business expansion plans shows that many firms are still positioning for long-term success, despite current headwinds. Additionally, the cooling of input price inflation offers relief, allowing manufacturers to better manage costs and remain competitive as they navigate this period of softer demand.”

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