Smaller manufacturing firms have seen their worst output performance in more than two years, a survey has revealed.
In the CBI's latest quarterly SME trends report, the percentage of respondents reporting weaker activity outstripped those seeing higher volumes for the first time since October 2009.
The CBI said the continuing uncertainty over the Eurozone and a broader loss of momentum in global growth were being felt by smaller manufacturers.
Alongside the deterioration in activity, optimism about the general business situation has fallen back following an improvement in the previous quarter.
Firms also plan to lower capital expenditure in the year ahead and expect to hold off hiring over the current quarter, the CBI added.
Out of 359 respondents, 23 per cent reported output volumes increased in the three months to July, while 28 per cent said they had fallen.
While the resulting balance of minus 5 per cent was the worst since minus 14 per cent in October 2009, a majority of firms still expect output to be broadly flat in the coming quarter.
The breakdown of the survey showed a slight fall in export orders while domestic orders were flat. Both are expected to decline over the coming three months, according to the SME firms polled.
"Production has fallen over the last three months and sentiment has deteriorated, while growth in demand has stalled, with little improvement expected in the coming quarter," said Lucy Armstrong, who heads the CBI's SME Council.
The findings echo last week's Markit/CIPS purchasing managers' index (PMI), which contracted for a third month in a row in July.