This comes against expectations that growth in activity will not hold up in the next three months. Total orders rose strongly once again (a balance of +19%) in the three months to July, and factory output continued to grow (+12%) at a pace above the long-run average. However, firms expect orders and production to be broadly unchanged over the next quarter (at +3% and +2% respectively), and are reappraising their business plans as a consequence.

Lucy Armstrong, Chair of the CBI’s SME Council, said:

“Orders and production have been strong for the UK’s smaller manufacturers this quarter, but growth is expected to stagnate in the next, and sentiment has fallen for the first time in two years. Confidence has also been affected by global economic and political uncertainty over issues such as the euro crisis and the US debt ceiling.

“As a result, manufacturers are re-assessing their business plans. They do not expect to take on any more staff in the next three months and intend to invest less in the year ahead.”

Firms increased their headcount (+17%) for the fourth successive quarter, at the fastest rate since January 1995 (+17%). However, with expectations of no growth in demand and output in the coming quarter, firms plan to keep numbers employed steady over the next three months (-2%).

In addition, investment intentions for the year ahead have weakened. Firms are planning to spend less on plant and machinery relative to the previous twelve months (-8%), with the survey balance turning negative for the first time in a year. Fewer firms are planning to expand capacity, and significantly more firms plan to invest only in replacing existing capital in the year ahead, with this proportion (58%) now the highest on record since the survey began in October 1988.

Cost and price inflation moderated considerably this quarter. Domestic and export price inflation slowed (+18% and +14%) from sharp spikes in April, and growth in unit costs also fell back (+34%).

A further easing in domestic price inflation is expected in the next three months (+8%). Export prices are anticipated to rise at a similar pace to this quarter (+11%), with both rates of growth still above their long-run averages. Cost inflation is also set to moderate, but remain relatively more elevated (+26%).