Employment in SME sector is up for first time since 2001

Employment in SME sector is up for first time since 2001

Sharp slowdown in SME service sector growth

Construction sector boosts SME economy and enjoys best quarter for output and new orders for 18 months

Input costs continue to rise in service and construction sectors -

Employment across the UK's small and medium sized enterprises (SMEs) is up for the first time since 2001 reflecting efforts to boost capacity to cope with a steady stream of new business according to the 'PKF SME Index', a quarterly survey of 800 SMEs operating in the manufacturing, construction and service sectors.

Both the service and construction sectors reported a rise in staffing levels in the fourth quarter although manufacturing continued to make staff cuts. Recruiting and retaining good staff at affordable salaries continues to be a greater problem for SMEs than cutting staff numbers*. Staffing levels have improved in the North, the Midlands, and Wales & the South West but continue to fall in London & the South East, the East and Scotland.

SMEs are still facing a tough 2003 as the sector's output growth faltered in the last quarter of 2002. The service sector experienced the sharpest slowdown in the pace of growth contrasting with the construction industry which recorded its strongest growth in output since the middle of 2001.

The growth of new business was sustained to the end of the year but varied considerably between sectors. Whilst construction enjoyed its best quarter since the middle of 2001, the service sector faltered and new business continued to 'flatline' in the manufacturing sector.

The pace of growth slowed across the regions but Wales & the South West continued to register the strongest expansion for the second quarter running at 54.3 (where 50.0 is no change). The East had the weakest growth at 51.1.

Input costs continued to rise in the fourth quarter making input price inflation the sharpest since the first quarter of 2001. The three main input costs that have had the most impact on SME businesses during the past 12 months are rising staff costs, increased insurance premiums, and rent and rates.

The increased staff costs are caused by a combination of factors including the Minimum Wage, the implementation of new regulations such as the Working Time Directive and Stakeholder Pensions, and increased salaries to attract and retain people with the right skills.

In response to the pressure on costs, output prices rose marginally but still below that of input costs. Strong competition and resistance from customers to pay more, means SMEs are unable to pass on most of their increased costs and profit margins are being further eroded.

Nick Winters, SME partner at PKF, commenting on the findings, said, The employment figures are encouraging but whilst SMEs managed to keep their head above water in 2002, they are under no illusion that 2003 is going to be a tough year. In the face of rising costs that they cannot pass on to the customer, they are having to work harder, market more effectively, and squeeze as much overhead cost out of their businesses as possible.

As competition from Euroland gets stronger, UK SMEs are having to cope with rising compliance costs, higher taxes, and the continuing skills shortage which is driving demand for inflated salaries in many sectors.

Despite these pressures, more than half of the PKF Growing Business Forum are planning to increase their levels of marketing in the next 12 months in the recognition that they have to fight harder to maintain their market share and retain their existing customers. The internet is increasingly being regarded as the most cost-effective medium for communicating with existing and new customers.
*full historical data may be obtained from NTC. Contact Luke Thompson on Tel: 01491 418 626.

Copies of the PKF SME Index, quarterly performance survey of small and medium sized enterprises are available free by emailing amanda.young@uk.pkf.com