An increase in exports failed to lift the gloom hanging over British manufacturing in January, as weaker-than-expected domestic demand and rising costs continued to hit output and employment, according to the latest survey of UK industry.

More than two-fifths of firms questioned in the CBI’s monthly industrial trends survey reported lower than normal order books while 14 per cent said they were better than usual. The resulting balance of -28 is six points worse than last month and the weakest reading since August 2005. Analysts were expecting an improvement to -20.

One bright spot was an improvement in the export balance from -23 in December to -10 this month as increasing global activity - particularly in the Eurozone - boosted demand.

The CBI said the combination of rising costs and weak domestic demand had taken its toll on manufacturers, forcing them to lay-off 25,000 workers in the last three months. The total number of manufacturing jobs lost in the last year is now 106,000, according to the CBI.

Ian McCafferty, the CBI’s chief economic adviser, said: "Conditions for manufacturers are getting increasingly tough as costs continue their seemingly inexorable rise but weak demand keeps prices down, squeezing already thin profit margins even further.

"The sustained high level of oil and sharply increased gas prices have driven up energy and raw material costs and manufacturers are continuing to respond by cutting employment to curb the wage bill."

The CBI''s survey also revealed that a net balance of +18 of manufacturers expects to reduce employment over the next four months, the largest proportion since the third quarter of 2003, while and a net balance of +24 expects to cut investment spending.

John Butler, the chief UK economist at HSBC, said manufacturers’ investment intentions posed a real risk to the UK economy.

"The Bank of England is expecting a strong investment recovery this year, while the risk of rising unemployment could undermine the consumer," he said.

The survey data also included mixed messages for the Bank of England’s rate-setting Monetary Policy Committee (MPC), with output still weak but price expectations rising.

The MPC has kept the cost of borrowing unchanged at 4.5 per cent since August's quarter point cut, despite five consecutive quarters of below-trend growth, because of a fear that a year of soaring energy costs might trigger an inflationary spiral with wages and prices both rising.

Howard Archer, chief UK economist at Global Insight said: "What manufacturers need more than anything is a significant, sustained pick-up in domestic demand and they will clearly be hoping that the Bank of England delivers an early cut in interest rates," he said.

"But, the MPC will be perturbed to see the index measuring manufacturers' domestic price expectations rising sharply to a 12-month high in January. This is likely to increase its caution about cutting interest rates in the near future."

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