Output among small and medium-sized (SME) manufacturers fell in the three months to October, as both domestic and export orders dropped, according to the latest CBI SME Trends Survey.
The survey of 434 smaller firms reported that output growth fell at the fastest pace since January 2013.
Domestic orders also fell for the first time in over two years, whilst export orders declined at their fastest pace since 2009.
However, domestic orders and output are expected to steady in the coming quarter. Meanwhile, exports are expected to decline at a slower pace.
Growth in numbers employed weakened in the last quarter, and employment is expected to be broadly flat through to January.
Business optimism fell for the first time since January 2013, as did optimism over export prospects in the year ahead.
Firms no longer expect to increase expenditure on product and process innovation in the year ahead.
Rain Newton-Smith, CBI director of economics (pictured), said: “As demand has fallen, especially in the face of a strengthening Pound, our smaller manufacturers have had a tough quarter, with orders and output volumes dropping.
“Manufacturers expect conditions to stabilise somewhat over the quarter ahead, but remain concerned about the outlook for demand.
“Innovation and technology are crucial to driving productivity, and that’s why it’s vital the Government uses the Comprehensive Spending Review to prioritise spending that supports skills and innovation, spurring a revival in productivity growth in the UK.”