The Confederation of British Industry (CBI) has warned UK small and medium sized businesses (SMBs) to expect domestic orders to drop over the next few months as spending tightens and costs rise.

Despite the fact manufacturers actually saw output grow in the final three months of 2007 – thanks in large part to strong overseas orders – a CBI survey has revealed that cost hikes and a dip in confidence among the business community is likely to put a dent in the next quarter.

The employers' group said many firms expect profit margins to be hit by increased costs that will force them to jack up pricing, which is expected to lead to a slump in sales.

It added that SMBs will struggle to absorb the shock if the economic downturn continues to bite.

CBI SME chairman Russel Griggs said: "Though smaller manufacturers enjoyed the best overseas demand in over 12 years last quarter, and last week's interest rate cut will provide some relief, uncertainty about the future is growing across the sector.

"Firms, especially the smallest, are no longer able to absorb rising input costs and, even with fears of weakening demand, are now being forced to raise prices. This continued squeeze on profit margins means that product and process innovation is ever more important."

Griggs added that the government's recent adjustments to the capital gains tax system had not gone far enough to allay SMBs' concerns.

However, it's not all doom and gloom for the manufacturing industry, where planned capital expenditure on product and process innovation is at its strongest level in a decade.

CBI's results can be viewed here (http://www.cbi.org.uk/ndbs/press.nsf/0363c1f07c6ca12a8025671c00381cc7/8435d79b9009b795802573e600419d89?OpenDocument). ®

Related stories

Small businesses aren't worried about technology (6 March 2008)
http://www.theregister.co.uk/2008/03/06/sme_survey/
Ingram Micro slams credit crunch 'negative thinking' (30 January 2008)
http://www.channelregister.co.uk/2008/01/30/ingram_micro_credit/
Darling backtracks on CGT (24 January 2008)
http://www.theregister.co.uk/2008/01/24/darling_cgt_entrepreneurs_u_turn/
Credit crunch cranks up pain for SMBs (17 December 2007)
http://www.theregister.co.uk/2007/12/17/smb_economic_outlook_cbi_2008/
UK claims millions saved by scrapping redundant regs (11 December 2007)
http://www.theregister.co.uk/2007/12/11/red_tape_savings/
Darling could backtrack on capital gains (27 November 2007)
http://www.channelregister.co.uk/2007/11/27/darling_cbi_speech/
UK.gov to cut corporation tax, plug private equity (9 October 2007)
http://www.theregister.co.uk/2007/10/09/chancellor_statement/
Crisis? What crisis? (27 August 2007)
http://www.channelregister.co.uk/2007/08/27/credit_crunch_exchange_rates_channel/