Manufacturing output has held steady in the fourth quarter at the previous three months' record high and companies have stepped up hiring, but they are less confident about the outlook for 2011, according to a survey.
The Engineering Employers' Federation said a balance of 33 per cent of firms reported a rise in output in the fourth quarter, unchanged from the previous three months which was the highest level since the survey began in 1995.
However, the balance of firms planning to raise prices climbed to its highest point in more than two years.
Companies say they plan to pass on higher commodity prices and some also hope to rebuild margins that shrank during the recession, the EEF said.
A balance of 16 per cent of companies expects to raise domestic prices in the next three months, compared to five per cent in the previous quarter.
A balance of 12 per cent think export prices will go up, compared to five per cent in the previous three months.
The Bank of England, wrestling with above-target inflation and a slow economic recovery, has forecast that price pressures will rise early in 2011 before falling back below its two per cent inflation target in 2012.
"Manufacturers are ending the year on a high and should enter 2011 on a strong footing," said Lee Hopley, EEF's chief economist. "But the strong bounceback has also brought challenges, with some manufacturers struggling to get the skills they need and facing rising costs."
Separate figures last week showed a strong pick-up in the UK manufacturing purchasing managers' index in November, while growth in the dominant services sector eased from a four-month high in October.
Most economists expect GDP growth to slow sharply in the final three months of this year from the third quarter's surprisingly robust 0.8 per cent expansion.
The EEF said its fourth-quarter survey highlighted a strong performance across all manufacturing sectors, leading to a record high balance of 23 per cent of companies taking on workers.
It was the third consecutive month of positive employment figures following an 18-month recession that ended in late 2009.
However, the survey found anecdotal evidence that companies are using temporary staff and agency workers, rather than full-time staff, to meet demand.
While growth is expected to slow in 2011, a balance of 17 per cent of companies still expect output to rise in the first quarter. That is above the long-run average for the series.
However, the EEF said companies are worried about the effect of rising commodity prices, credit constraints, trade tensions and currency wars.
"Manufacturers are still somewhat cautious about making significant investments in new machinery or taking on permanent employees," the EEF's report said.
City A.M. Reporter