UK factory orders hit two-year high

British companies placed more orders with manufacturers last month than in almost two years, a snapshot survey of factory bosses showed yesterday, painting an improving picture of the UK economy.

Stronger domestic demand, particularly from shipbuilders, aerospace companies and others in the capital goods sector, compensated for flat orders from exporters, according to a study of some 680 firms by the CBI, the UK's largest employers group.

The survey suggested manufacturers were keen to exploit the improving economic backdrop by raising prices, which could stoke inflation, economists warned. "Inflationary pressures that are becoming ever more evident were also clear in this survey," Alan Clarke, the UK economist at BNP Paribas, said.

More firms said they expected to increase their average prices over the next three months than at any time since January 2005. They are seeking to recoup lost profits after the recent surge in energy and raw material costs.

Ian McCafferty, the CBI's chief economic adviser, said: "The outlook remains encouraging for UK manufacturers. But it is disappointing that export orders have not improved more, given the current revival of the eurozone economy, our principal export market." He warned that given "continuing intense international competition", firms could struggle to raise prices.

Despite the pick-up in August, total orders remained below normal according to a balance of 8 per cent of manufacturers, the CBI's monthly industrial trends survey showed. This was an improvement on the balance of 11 per cent that reported below-normal orders in July. The last time order books were better than normal was in August 2004.