Greater confidence across the sector is also continuing to translate into some recruitment, albeit being driven by temporary or agency working which gives employers greater flexibility should demand begin to slow.

Uncertainty about future demand had been dampening investment plans, but a number of sectors are now planning to increase in investment. The positive investment intentions posted this quarter breaks the pattern of previous recessions by recovering at an earlier stage in the cycle.

However, the short-term optimism highlighted by EEF’s survey is shaded with a degree of caution about the risks to growth in 2011 pointing to fiscal consolidation in the UK, a weaker outlook for the US and risks to the sustainability of Asia’s recovery.

Commenting, EEF Chief Economist, Ms Lee Hopley, said: “Manufacturers have continued to reap the rewards of growth in overseas markets with the upswing being felt across all sectors and regions. Not only has this continued to translate into better employment prospects but the recovery in investment has begun much earlier in the cycle than after previous recessions.

“However, we have to maintain perspective that the recovery is coming from a very low base and the risks to the economy in the medium term haven’t gone away. The rebound in exports and modest improvement in investment will need to become much more firmly entrenched if we are to see a much-needed rebalancing of the economy.”

Over the last three months, output and new order balances were +33% and +35% respectively, both record levels since the survey began in 1995 which suggests growth in manufacturing output should at least continue into the next quarter.

This growth has been driven largely by export markets (+30%), where Europe in particular turned out to be stronger than expected. Whilst the domestic order balance weakened slightly, the balance of +20% is still above its long term average. Furthermore, growth continued to be broad based across all regions and sectors.

The survey was also notable for two other factors. Firstly, the balance of companies recruiting almost doubled in the last three months to +17%, the strongest in the survey’s history.

Secondly, the investment balance turned positive to +7% for the first time since 2008q2. Compared with previous recessions, where investment balances have tended to lag behind increases in output by over a year, this is a somewhat faster recovery in capital expenditure intentions and signals that companies are becoming more confident to begin investing in plant and machinery.

Looking forward, expectations about future prospects remain positive, with a balance of 27% of companies expecting output to increase in the next three months, and 22% expecting orders to expand. Both of these balances are higher than the previous quarter’s figures suggesting there is confidence that the recovery will continue into the next quarter at least.

EEF also published its latest forecasts for the UK economy and manufacturing. These show the economy growing by 1.5% and 2.1% in 2010 and 2011 respectively whilst manufacturing will grow by 3.7% in 2010 before easing back slightly to 3.2% in 2011.

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