The UK's smaller manufacturers have reported a sluggish recovery over recent months despite an overall upturn in the economy, according to the latest survey.

Higher interest rates and record oil prices have taken their toll on the sector.

In a report published on Monday, the CBI found that business optimism is "broadly unchanged" since three months ago, having improved at its fastest rate for two years in the previous survey.

Over the summer orders have been hit by a marginal fall - smaller manufacturers have seen the pace of recovery slow since the start of the summer

The CBI said the pause in growth could reflect the initial impact of higher interest rates in the UK, which have risen five times in eight months.

There has also been a moderation in demand in previously fast-growing overseas markets, in particular the US.

Output increased at a similar pace to the last quarter.  Although growth remains relatively modest, the balance of plus five per cent is the highest since January 1998.

Hugh Morgan Williams, chairman of the CBI's SME Council, commented: "Although we have seen a slight pause in the recovery for smaller manufacturers, there are encouraging signs of a positive trend.

"Employment figures are up for the first time in six and a half years. The number of companies working below capacity has fallen to its lowest level for almost seven years.

"However, the recovery is fragile and has started from a low base after a long period of decline.  There is no let up in cost pressures or in the strength of competition in the market, which both continue to squeeze margins."

Morgan Williams went on to warn that the peak in interest rates "should not be much higher than the current level".

"It is especially important to smaller manufacturers that the Bank of England does not apply the economic brakes too hard as the sector is more vulnerable than most," he added.