More gloom was hanging over manufacturers today after a weak survey prompted warnings of a recession in the sector.

A balance of just three per cent of manufacturers said they expect output growth next year - the lowest level for almost two years, according to the CBI's December industrial trends survey.

Capital Economics expert Paul Dales said the survey was a "forewarning of recession" in the sector after the CBI also reported an easing of demand.

Although manufacturers enjoyed their first positive growth in exports since February thanks to sterling's fall in value against the euro, the overall balance of companies reporting higher than normal orders fell to two per cent - well below City expectations.

Global Insight chief economist Howard Archer added: "The survey suggests that the recently resilient manufacturing activity is now beginning to flag in the face of serious headwinds."

Manufacturers have been hit by five interest rate rises in the past year before last week's cut and hampered by the pound's strength against the dollar.

But firms are "stepping down a gear" rather than coming to a standstill, the CBI insisted.

Despite the prospects of slowing growth, a balance of 15 per cent of manufacturers remain confident about passing on rising energy and raw materials costs.

Ian McCafferty, the CBI's chief economic adviser, said: "It is a case of the sector changing from fifth gear to fourth, certainly not juddering to a halt.

"Firms still feel able to push through price increases in the next three months.

"And even as the domestic market slows, they are enjoying a period of strong demand from overseas."

Inflation concerns over the sector were stoked earlier this week after soaring fuel and food costs drove factory gate prices higher at their fastest annual rate for more than 16 years during November.

This could deter Bank of England policymakers relieving the sector by cutting rates further in the immediate future.

Mr Archer said manufacturers faced a bleak year ahead.

He said: "Going forward, we expect the manufacturing sector to lose further momentum as it is buffeted by the credit crunch, slowing domestic demand, elevated oil prices and a still strong pound against the dollar."