British manufacturing saw a sharp increase over the last three months, according to a new survey, but companies are still holding back investment.

EEF, the manufacturers association, said its measures of output and new orders reached 30 per cent and 34 per cent, respectively, over the second quarter of the year - the highest levels since the survey began in 1995 and up from eight per cent and two per cent in Q1.

However, 65 per cent of companies said uncertainty over domestic demand was limiting new investment, while 46 per cent blamed uncertainty over future tax changes and over half citing lack of finance or decision by a parent company.

‘Manufacturers are pulling in more export orders on the back of a recovering world economy and a better outlook for the domestic market is giving companies some confidence to recruit again,’ said Lee Hopley, EEF chief economist.

‘But manufacturers are very aware that economic headwinds could still pick up again as there are still risks to a sustained recovery. In the short term this requires a budget that delivers tax reform and deficit reduction in a way that provides some stability and gives manufacturers the confidence to invest.’

EEF forecasts 3.5 per cent manufacturing growth this year and next, while engineering output, which fell by 15 per cent in 2009, is expected to grow by 6.4 per cent in 2010.

The balance of firms expecting output to increase was 22 per cent, while the figure for those expecting increased orders was 20 per cent. A balance of 15 per cent expected to recruit new staff over the next quarter.

The survey was conducted between 5 May and 26 May with 547 companies across the engineering sectors responding.

EEF’s balance measures represent the difference between the number of firms that answer ’yes’ to each question in the survey and the number that answer ’no’.