The EEF's Business Trends Survey, compiled with accounting firm BDO, showed that the number of companies in the UK reporting growth in output and orders was down to 4% and 3% respectively compared to 20% and 17% last quarter. The fall in output represents the biggest quarter-on-quarter decline since Q1 of 2009.
Further findings from the survey, conducted on 369 companies in August, suggested that both domestic and export markets were declining, with 23% reporting reduced margins in overseas sales and 19% claiming UK deals were less profitable.
Employment levels remained steady: 16% of companies said that they had increased their staff base, a trend that has continued for its tenth consecutive quarter.
However, SME recruitment levels were much higher than in larger companies, suggesting that the trend is unlikely to lead to significant increase in manufacturing employment.
Fifteen per cent of respondents were optimistic about the next quarter, expecting growth in output levels, although only 3% of manufacturers were confident that export orders would pick up.
BDO head of manufacturing Tom Lawton said: "The results of the survey paint a dark picture with weakening markets across the board. Inevitably Europe continues to serve as a drag on exports and even the previously buoyant emerging markets are beginning to falter.
"However, it is not all bad news. Larger companies that have the ability to invest are continuing to do so and smaller companies are wary of not suffering a skill shortage by ensuring that they employ the best talent.
"This indicates that manufacturers have learnt the mistakes of the past, are investing for the long term and are preparing themselves for an upturn in the market, whenever and wherever this may occur."
