LONDON: Smaller British manufacturing firms are leading the economy to recovery, the Confederation of British Industry says. Output from these companies over the past four months grew at its fastest rate in five years, faster than the manufacturing sector as a whole, the CBI's quarterly Smaller Firms Economic Report shows. What's more, these smaller companies expect output to increase at a similar rate over the next four months. ''Smaller firms are leading the recovery and their owner managers are forecasting increased improvements in many, but not all, areas,'' said Richard Brucciani, chairman of the CBI's Smaller Firms Council. The survey polled 745 companies, employing 200 people or less, between December 17 and January 12. Mr Brucciani was cautious about the ability of firms to sustain this increased activity, however. In particular, he was concerned about the effect on consumers of the introduction of indirect tax increases on April 1 this year. ''There is still major concern about the shortage of sales and orders and 86 per cent of those surveyed felt this could limit output over the next four months,'' said Mr Brucciani. ''These orders could be threatened if consumer demand slows as a result of April's tax increases.'' The survey shows job prospects improving, however, and for the second quarter in a row more companies reported hiring new employees than firing them. The growth over the past four months was the fastest since July 1989 and was expected to be sustained during the next four months. The survey also displayed broad-based economic optimism over the past four months. While export orders rose, business confidence increased for the fifth consecutive survey and export optimism rose for the sixth consecutive time. Export optimism was of particular note as there had been concern among many economists that the recent strength of the pound would damage the competitiveness of British goods overseas. A stronger pound would also make British exports more expensive. A balance of nine per cent of firms reported increased export orders, however, and a balance of 20 per cent expected new export orders during the four months ahead. That pointed to the highest rate of increase since January 1990, the CBI said. News on inflation was mixed. Although a number of firms said the growth in unit labour costs slowed in the four months to January, for the second consecutive survey, a balance of 13 per cent expected unit costs to rise during the next four months. Similarly with output prices, a 10 per cent negative balance showed more firms cut prices than raised them during the past four months, but more firms expected to increase prices in the months ahead. The CBI played down the significance of this, however, by saying that many firms tended to revise price lists at the start of the calendar year. In the British banking sector, major banking groups made gross mortgage loans of GBP1.36 billion (about HK$15.7 billion) in December last year, a drop of 14 per cent from GBP1.57 billion in November, according to the British Bankers' Association (BBA). Figures for net lending, which are seasonally adjusted, showed a fall of nearly 16 per cent to GBP733 million. However, over the fourth quarter of 1993 as a whole gross lending at GBP4.56 billion was 26 per cent higher than in the same quarter of 1992, the BBA said. Over the year as a whole the major British banks made record gross loans of GBP19.26 billion. ''This was a rise of over 16 per cent on 1992, and although figures for all lenders are not yet available, probably represents their largest annual market share,'' said Lord Inchyra, director general of the BBA. Fixed-rate loans were continuing to be popular and their proportion of total lending rose to 62 per cent, said Lord Inchyra. The major British banking groups include eight of the 20 largest mortgage lenders in the country.