Manufacturing industry is enjoying the healthiest spell of Business for almost 12 years despite interest rate increases and the strength of the pound, says the CBI. But the Office for National Statistics figures suggest the claimed productivity improvements may have been overstated.

Order books are the strongest since June 1995 and production, rising to cope with the flow of business, is also on course to reach a 12 year high, according to the employer organisation’s latest trends survey. Domestic demand, led by the consumer goods sector is boosting order books, while export business is showing signs of recovery. Stronger orders for capital goods is helping to reinforce the production recovery.

The CBI’s economic analysis unit survey results provide an insight into how the manufacturing industry, now accounting for about 15% of the economy, has regrouped, slimmed down and begun to benefit from improvements in efficiency.

Improvements in competitiveness have helped but with hugh swathes of manufacturing capacity lost to foreign rivals the trade gap continues to grow. Last year, Britain was running an £84bn deficit on trade in goods. Higher productivity is being cited as helping the turnaround, although revised figures from the Office for National Statistics suggest the improvement may have been overstated, as international comparisons shows that measured on the basis of gross domestic product per worker, productivity in Britain in 2005 lagged behind the average of all other major industrialised nations.

The British performance was on a par with Germany, Italy, and Canada but lagged behind the US level.