Factory output rebounded early this year, and firms expect to grow at their fastest pace for 12 months in the coming quarter as worries about the euro zone subside, a survey by trade body EEF showed on Friday.
The figures add to signs that Britain's recovery is back on track after a dip at the end of last year. They are also likely to reinforce expectations that the Bank of England will not expand its quantitative easing programme once the current 50 billion pound round of asset buying is completed in May.
However, the EEF warned that weak household demand and rising oil prices could yet throw the economy off course, and urged finance minister George Osborne to give firms tax breaks to boost private-sector investment in his March 21 budget.
The EEF said its survey showed a balance of 19 percent of firms reported a rise in output in the last three months, with a balance of 13 percent recording a rise in total new orders.
That was better than the balances of 0 and -1 they had predicted at the end of last year.
And companies are more optimistic about the future, with a balance of 28 percent expecting output to rise in the next three months, and 22 percent predicting higher orders - both the highest readings in a year.
EEF chief economist Lee Hopley said the second bailout package for Greece and a rosier outlook for Asia and the United States had helped to lift confidence from the doldrums.
The level of uncertainty we were facing was really weighing down on production and order intake. That has been shaken off, and the survey suggests things will be a lot better in Q2, she said.
But she warned that the British economy as a whole faced an uphill challenge this year, said that the government should do more to encourage firms to invest in the UK.
The survey showed that even though firms expect their order books to improve, they reckoned their profit margins would remain under pressure, and cashflow was also likely to remain tight in the next three months.
And the EEF halved its forecast for manufacturing growth this year to 0.5 percent from 0.9 percent, though that largely reflected the drop in manufacturing at the end of 2011, and growth in the sector is seen picking up to 1.8 percent in 2013.
A separate survey by Lloyds Banking Group on Friday suggested consumers are feeling more confident about the employment outlook.
Lloyds' Consumer Barometer showed Britons confidence in their job prospects rose to a balance of -69 in February -- its highest since September, though that was still below its level throughout 2010 and in most of 2011.
The survey of 2,012 people showed Britons also felt more secure in their jobs than a year ago. However, they still expect interest rates to remain low.
(Reporting by Fiona Shaikh)