In its latest economic survey, the British Chambers of Commerce (BCC) found that the manufacturing sector has performed strongly during the first three months of the year.
The services sector has also recovered from its declining performance in the two quarters immediately following the EU referendum vote.
Firms in the manufacturing sector reported a 20% increase in domestic sales and 26% in exports, while the service sector sales increased by 22% and 10% respectively.
Manufacturing and service sector businesses also increased recruitment in Q1, but continued to experience high levels of hiring difficulties, the BCC found.
Moreover, 76% of manufacturers reported an increase in the price of raw materials, up from 65%. Within services, the percentage stood at 17%.
Adam Marshall, director general of the BCC, said, “In the here and now, many businesses are resilient and experiencing solid growth. Many firms tell us their short-term expectations are strong, but that the medium-term picture is far from clear.
“The rise in inflation seen since last year's EU referendum is the biggest immediate pressure facing most firms. While manufacturers have enjoyed a good quarter, they are facing higher costs at the factory gates, which increasingly translates into companies having to raise their own prices.”
Suren Thiru, head of economics at the BCC, warned that inflation is currently a key risk to the UK’s growth prospects, with businesses having to manage rising costs and the pressure to increase their prices.
Thiru added that, if higher inflation squeezes consumer spending, the current strength in business activity may not be enough to prevent a period of more muted economic growth.
Also on Thursday, the Federation for Small Business (FSB) published its Small Business Index (SBI). It found that confidence among small businesses has recovered significantly since the referendum, thanks to an increase in international trade.
According to the group, the SBI stood at 20.0 in the first quarter of the year, the highest level in over a year. After the EU referendum, the SBI was -2.9.
Over the last three months, 15.6% of SMEs reported an increase in export activity, while 30.5% expect international sales to increase over the next quarter.
However, 64.5% of SMEs said their operating costs have increased over the last quarter, the highest proportion since 2013. The main reasons were fuel (36.8%), labour (35.9%) and the exchange rate (26.9%).
Meanwhile, 74.5% of SMEs were successful in their applications for credit in Q1, and 11.3% plan to increase their headcount over the next quarter.
Mike Cherry, the FSB’s national chairman, said, “It’s hugely encouraging to see our small businesses trading more overseas, driving an exports-led recovery.
“We know small firms that export have higher turnovers than those who rely on the domestic market, so it’s crucial that the government maximises cross-border trade opportunities for small firms.”
As a result, the FSB urged the government to negotiate an “ambitious” free trade agreement with the EU as part of the Brexit process, which it said must include a dedicated small business chapter and the easiest possible access to the single market.