The UK’s beleaguered manufacturing sector is showing some fledgling signs of recovery with factories reporting their highest order book levels in eleven months, according to the latest survey of industry.

In the CBI’s monthly industrial trends survey the balance of factories reporting order books above normal against those saying they were worse than usual improved to -18 in February compared to -28 in January

The February balance was the best since last March and came despite a decline in the export orders balance, to -17 from January’s -10.

The CBI said manufacturers now expect output to grow modestly over the next three months, with the positive outlook helped by a run-down in stocks of finished goods.

"This survey provides some encouraging news," Ian McCafferty, the chief economic adviser at the CBI, said. "Demand conditions facing the sector are the best for nearly a year and if respondents’ expectations are realised, the decline in output through 2005 may finally be coming to an end," he added.

But worryingly for the Bank of England, which has kept the cost of borrowing unchanged at 4.5 per cent since August’s quarter point cut because of inflation fears, the prospect of better demand conditions has led to an improvement in manufacturers' price expectations.

For the second month running, more firms now expect to be able to raise prices than reduce them -- although analysts said the balance of +6 was unlikely to pose a significant inflation threat. The CBI also noted that "substantially higher" energy costs would continue to squeeze manufacturers’ profit margins.

Howard Archer, chief UK economist at Global Insight said: "The CBI survey was significantly stronger than expected in February, although this should partly be seen as the survey catching-up with the recent improvement seen in the purchasing managers' survey and the hard manufacturing output data.

"Nevertheless, the latest news on the manufacturing sector has clearly been modestly more upbeat overall, suggesting that the sector may be able to make a positive contribution to overall GDP growth in the first quarter of 2006 for the first time since the end of 2004."

But John Butler, chief UK economist at HSBC, offered a note of caution. "Overall, this is a better than expected survey but it is unclear whether the greater optimism will be reflected in the official data," he said.

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