The Confederation of British Industry's latest quarterly report into the Small and Medium Enterprise (SME) sector paints a less gloomy picture than many business leaders may have previously feared.

The report concludes that the market is showing signs of recovery from the attacks on the World Trade Center, which shattered confidence already dented by the first stages of a global slowdown. But now, optimism is beginning to return despite exports showing worse than expected results.

Over the last four months, 24 per cent of firms reported a rise in order totals and 39 per cent suffered further downturns. It had been predicted in October that the differential would top minus 25 per cent, as it is minus 15 per cent points represents a much more moderate decline. Based on that figure, the CBI anticipates a balance of minus nine in four months time.

Simon Bartley, Chairman of the CBI's SME Council, said: "There is some reassurance in this survey. Manufacturers, particularly smaller ones, continue to face tough times with orders and output still suffering but the rate of decline is slowing. It also seems the slump in confidence in the immediate aftermath of September 11 was short-lived. Firms are a little less gloomy about their export prospects but some sign of a pick-up in global demand is desperately needed."

Medium-sized companies were found to be much less optimistic than smaller enterprises on prospects for the next four months. Particularly so as these businesses suffered the strongest deterioration in export confidence over the past four months with a balance of minus 40 per cent.

With total new orders declining in the last four surveys, 39 per cent of firms now have less than a month's guaranteed production on their books. Another 42 per cent have only between one and three months' worth of production.

Employment in SMEs has declined at a faster rate than expected but that is expected to turn around in contrast to the picture for manufacturing as a whole where job-cutting is expected to remain high.

Elsewhere, the annual rate of inflation surged past the 2.2 per cent prediction rate to achieve a 2.6 per cent for the month of January.

This significant leap from the 1.9 per cent rate for December has lead many analysts to predict that the Bank of England will counter the rise with an interest rate hike.

(GMcG)