The CBI's latest quarterly SME Trends Survey revealed that volumes of domestic and export orders among smaller firms rose at the fastest rate since April 1995.
Of the 414 respondents, 39% reported a rise in the volume of domestic orders in the three months to April, and 23% a fall, giving a balance of +16%. For export orders, 37% said volumes increased, and 14% said they declined, giving a balance of +23%.
Lucy Armstrong, chair of the CBI's SME Council, said: "Smaller manufacturers are enjoying strong demand for goods at home and abroad, underpinning robust growth in production.
"Headcount has increased for the third consecutive quarter as firms try to keep up with demand, and output is expected to rise again in the coming months.
"However, inflationary pressures remain a dark cloud, with rising oil and commodity prices pushing up the cost of production and eating into profit margins. Manufacturers have raised output prices rapidly to cope, and expect to continue doing so over the next quarter."
Inflationary pressures show no sign of easing in the coming quarter, with firms expecting unit costs to increase sharply again (+52%), and both average domestic (+26%) and export price inflation (+21%) to remain strong.
Looking ahead, firms expect demand to continue to strengthen in the next quarter, though at a slower rate. While firms anticipate a similar rise in output (+16%), domestic (+9%) and export orders growth (+6%) are set to ease, although remaining well above long-run average rates.
But there is some evidence of tightening capacity pressures. While the rate of capacity utilisation remains close to the long-term average, 25% of firms cite plant capacity as a potential constraint on output over the next three months, the highest figure since October 1988 (25%).
Investment intentions are generally strong for the year ahead, and firms plan to spend more on plant and machinery (+10%), product & process innovation (+19%) and training and re-retraining (+10%).
Overall, 12% of firms are more optimistic about the general business situation compared to three months ago (+3%).