Small manufacturers saw a pick-up in production in the three months to January as domestic demand for UK-made goods improved, according to the CBI.
However, the business body found firms were facing strong cost pressures which were feeding through to higher domestic and exported goods prices.
Some 30% of 366 respondents in the CBI's latest SME Survey reported a rise in output volume while 17% reported a fall. The overall balance (+13%) was slightly weaker than expected but stronger than the +9% balance in the previous quarter.
Lucy Armstrong, chairman of the CBI's SME Council, said: "Manufacturing is one of the few bright spots in the economy and this survey underlines the important role of smaller firms in delivering growth and jobs.
"With domestic orders steadily improving and production rising, firms are increasing their headcount to keep up with demand. But smaller manufacturers are facing intense cost pressures and are being forced to pass these onto customers. Both domestic and export prices have already risen, and an even sharper increase is expected in the coming quarter."
The CBI said domestic orders were showing the fastest increase since January 1997, with 28% of firms reporting a rise in volumes and 20% a fall, giving a balance of +8%. Export orders also showed a modest rise.
But high cost pressures were weighing on profit margins and most firms expected domestic and export prices to rise.
The CBI also said that with domestic demand and output improving, a balance of +10% of firms increased the number of people they employed, the fastest rate of growth since April 1995.
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