Demand for goods made by the UK’s small and medium-size manufacturers remained depressed in the last three months, but firms expect order books to stabilise in the next quarter.

Moreover, they are the most optimistic about the business situation in two and a half years, according to the CBI’s latest quarterly SME Trends Survey.

Of the 424 firms surveyed, 40% saw the volume of total new orders decline in the three months to October, while 24 per cent reported a rise. The resulting rounded balance of -17 per cent is an improvement on the previous quarter’s balance of -34 per cent.

In the coming three months, firms expect total orders to stabilise (a balance of -1 per cent).

As a result, the balance of firms feeling more optimistic about the general business situation (+9 per cent) is the highest since April 2007.

The volume of manufacturing output declined further during the last quarter with 35 per cent of firms reporting a fall, and 22 per cent a rise, giving a rounded balance of -14 per cent. This compared with a balance of -28 per cent in the previous quarter. Output expectations for the next three months remain negative (-7 per cent).

Russel Griggs, chairman of the CBI’s SME Council, said: "It is good to see SMEs feel more positive about business prospects than they have for two and a half years, and hope that orders will stabilise in the coming three months.

"However, current conditions remain challenging for many small and medium-size UK manufacturers, with orders and output still falling, and uncertainty about demand a major concern.

"It is disappointing that the export bounce, which medium-size firms had hoped to see, failed to materialise. Accessing finance remains a particular problem for this size of business, with a record proportion saying it is affecting their ability to invest."

Volumes of domestic orders fell in the past three months, though the balance of -19 per cent is less negative than it has been for a year-and-a-half.

Export orders continued to fall (a balance of -13 per cent), despite an expectation among medium-sized firms that they would rise (+27 per cent) and the relative weakness in Sterling. In the coming three months, firms are hoping that overseas orders will stabilise (+2 per cent).

Moreover, SMEs continue to feel more optimistic about prospects for exports in the year ahead, with a balance of +10 per cent an increase on last quarter’s two-and-a-half year high of +5 per cent.

Numbers employed in SME manufacturers continued to fall in the last three months, and while 15 per cent took on more staff, 30 per cent reduced their headcount, giving a rounded balance of -16 per cent. This was in line with expectations, and a slower rate of decline than the previous three quarters.

The inability of firms to raise finance continues to grow, with the proportion of medium-sized firms saying it is likely to limit their investment plans at a record high (30 per cent).

Access to credit and finance is continuing to constrain some firms’ export and output plans.

Firms are still running down their stocks, though slightly less aggressively than in previous quarters, and close to seven in 10 firms are working below capacity.