A cautious return to confidence for Manufacturing and Engineering SMEs

A few years ago, I developed – along with a statistician at the Manufacturing and Technologies Association – a confidence tracker for small to medium sized businesses, which we called the Business Sentiment Index. The score we calculate is based on four key indices (see bottom of this piece), and measures how business owners are feeling at a certain point of time.

The score for Manufacturing and Engineering typically tracks higher than the UK as a whole, and generally outperforms other sectors, including Construction and Transport, for example.

What we found the last time we conducted our research in May 2023 is that business confidence across all sectors – including Manufacturing & Engineering – rose for the first time since September 2021, following three consecutive falls and a low at the end of 2022. These were caused, in the main, by rising inflation, energy cost increases and higher interest rates.

Despite the headwinds still being faced by small and medium-sized firms and inflation stubbornly remaining in double digits, wholesale energy prices have fallen from their summer 2022 peaks, and there appears to be more certainty about where interest rates rises are headed, all of which is helping firms plan with more assurance.

This change in confidence is better understood when looking more closely at Manufacturing and Engineering businesses’ priorities, which are managing costs (29%; UK: 26%) and achieving growth (22%; UK: 28%) well ahead of issues like paying down debts (10%; UK: 9%) and business consolidation (9%; UK: 9%).

BSI scores – June 2020 to May 2023

Appetite for investment

Overall, the appetite to invest remains strong, as it was at the end of 2022, with 83% (UK: 75%) of Manufacturing and Engineering firms looking to seek funding for investment in the next 12 months.

Q: Does your business plan to seek funding for business investment in the next 12 months?

 Missed opportunities

The number of Manufacturing and Engineering companies that have missed business opportunities because of a lack of available funding stands at 47% (UK: 45%) in May 2023.

While this is an improvement, these are historically ‘high’ figures – for example, in May 2022, 37% of UK respondents answered ‘yes’ to the question ‘have you missed a business opportunity in the last 12 months, due to lack of available finance?’.

It would appear businesses are concerned about impacting their cashflow by dipping into their reserves or taking out a standard loan and adding to their debt burden.

Q: Have you missed a business opportunity in the last 12 months, due to lack of available finance?

Economic outlook

Manufacturing and Engineering businesses are more positive than negative about the macro-economic outlook, ‘outperforming’ the consolidated UK sentiment. Compared to the end of 2022, firms in the sector are considerably more optimistic than they were.

This indicator has contributed most to the decline in the overall BSI; for example, in November 2021 75% of respondents were positive about the economy – by December 2022 this had fallen to just 38%.

Predicted business performance

Predictions about future business performance remained stable, with the majority expecting their prospects to remain unchanged. Overall, fewer firms predict they will contract than earlier in the year (7% against 11%).

In general, how do you expect your business to perform over the next 12 months?

When I spoke with Steve Gee, CEO of our Industrial Equipment Division, he had this to say: “After well over a year of declining confidence – according to our data – it’s encouraging to see an element of positivity returning to the market, no matter how tentative.

“What business owners want, almost more than anything, is an element of consistency, which gives them the ability to plan and forecast effectively. Many of the recent challenges have been entirely unexpected, and after the difficulties of the past few years, it’s impacted their ability to grow.

“But what it has again demonstrated is the continued resilience of the UK and Ireland’s SMEs, and we’re looking forward to working with them in the coming months and years.”

 Box item –

Score calculation*

The BSI is based on the views of more than 900 business owners and senior members of the UK’s business community and calculated from data charting their:

• Appetite for investment in their business in the coming 12 months
• Access to finance and whether they’ve missed a business opportunity through lack of available finance
• Views about the UK’s economic outlook
• Thoughts on their likely performance in the coming 12 months