Two new business surveys confirm that manufacturing firms are leading the way out of recession.

According to the Confederation of British Industry, stronger demand and companies rebuilding stocks of goods helped boost production among the region’s smaller manufacturers.

But the business group said that growth is likely to stall in the next three months in the face of weaker demand.

Business advisers Price waterhouseCoopers said the UK manufacturing sector was emerging from the recession stronger and leaner than ever.

The CBI’s latest quarterly SME Trends Survey showed that 41 per cent of firms said output rose in the three months to July, while 20 per cent said it fell. The resulting balance of +21 per cent is the fastest growth since April 1995 and three per cent higher than the previous quarter.

The rise in output was driven by strengthening demand at home and abroad, with 37 per cent of firms seeing the volume of total new orders increase during the quarter, while 24 per cent saw a decline, giving a balance of +13 per cent, the fastest growth since July 1995.

Exports were particularly strong, with a balance of +22 per cent of firms reporting a rise in the volume of overseas orders, the fastest growth since April 1995. Domestic orders saw more modest growth of six per cent CBI regional director Andrew Palmer said: “Smaller manufacturers enjoyed a bumper quarter with production ramped up to meet growing demand and to rebuild stocks.

“Exports are leading the charge, reflecting the pick-up in global trade and the relative weakness of sterling, but firms are still seeing their profit margins squeezed because of rising costs.

“Looking ahead, firms do not expect such strong growth to be sustained into the coming quarter. Output is expected to dip slightly as demand looks set to weaken.”

PwC found that leading manufacturing businesses were not only able to improve working capital by up to 15 per cent in the recession, but also to improve gross margins by 1.5 pr cent through cost-saving initiatives.

Steve Ellis, business recovery partner in Leeds, said: “Although UK manufacturing has just experienced one of its worst periods of decline and turmoil, the majority of the companies we spoke to used it as an opportunity to carry out radical restructuring, cost reduction, improve agility and flexibility, renegotiate contracts and pension liabilities."