Optimism rose at the fastest pace since records began in 1988 among small and medium-sized manufacturers in the UK on the back of improving demand and output, according to the CBI’s latest SME Trends Survey.

Total new orders increased in the three months to October, driven by domestic orders which rose at their fastest rate since January 1995. Export orders rose at their fastest rate since April 2011, while optimism around export prospects for the next 12 months increased strongly.

Alongside the improvement in demand, output rose modestly and is expected to pick up at a faster pace over the next three months, accompanied by a further improvement in orders.

Greater optimism and activity among SMEs has led to a step change in investment plans for the year ahead, with forecasts for spending on buildings, plant and machinery, product innovation and training all in positive territory.

Stephen Gifford, CBI Director of Economics, said: “This has been a positive quarter for small and medium-sized manufacturers, with new orders and output both on the rise and further improvements expected next quarter.

“Optimism about the general business situation has improved and is now at a record high – and there is evidence of a general thaw in investment intentions for the year ahead.”

Key findings – three months to October:

• 42% of firms reported an increase in total new orders and 25% said they decreased, giving a balance of +17%, ahead of expectations of modest growth (+9%) in the previous survey
• 42% of firms reported an increase in domestic orders and 22% said they decreased, giving a balance of +20% – the highest since January 1995
• 33% of firms reported an increase in export orders and 19% said they decreased, giving a balance of +14% – the highest since April 2011
• Output increased modestly (+8%), beating predictions of staying unchanged in the previous survey (+1%). The latest balance was the highest since July 2011
• Output is predicted to increase further in the next three months (+15%)
• Manufacturers expect demand to strengthen again in the next three months, with robust growth in total new orders (+26%) and domestic orders (+23%).
• Sentiment about the general business situation rose for the second consecutive quarter, at a record pace (+35%), while optimism about export prospects rose for the third consecutive quarter – at its fastest since July 1995 (+23%)
• Numbers employed grew moderately (+7%) and headcount is expected to increase in the coming quarter (+14%)
• Average domestic and export prices were broadly flat (-1% and -3% respectively)
• Average unit cost inflation (+8%) was broadly in line with the previous quarter (+10%)
• Manufacturers’ investment intentions are up on the previous quarter, with plans to spend more on buildings (+5%), plant and machinery (+11%), product and process innovation (+21%) and training (+21%) relative to the past 12 months. In particular, plans for spending on buildings turned positive for the first time in the survey’s history (since October 1988).