Businesses are recovering from the events of September 11 but confidence remains low, the CBI says.

The Confederation of British Industry's survey of small and medium sized businesses found a smaller drop in the number of orders than had been expected.

Of those interviewed, 39 per cent reported a fall in orders, against 24 per cent reporting an increase. The 15 per cent balance represents a smaller decline than the 23 per cent that had been expected.

Smaller firms suffered most in the domestic market, but fared better in exports.

There was a 22 per cent negative balance between small companies reporting and increase and those reporting a fall in export sales, compared to the 40 per cent balance among medium firms.

Although confidence has improved since the October survey, it remains low. While 13 per cent of those businesses interviewed said they were more optimistic, 40 per cent responded that they were less so.

Simon Bartley of the CBI said there was "some reassurance" to be drawn from the findings.

"Manufacturers, particularly smaller ones, continue to face tough times with orders and output still suffering but the rate of decline is slowing. It also seems the slump in confidence in the immediate aftermath of September 11 was short-lived.

"Firms are a little less gloomy about their export prospects but some sign of a pick-up in global demand is desperately needed," he said.

A spokesman for the Federation of Small Business said that, while companies were prepared for a future downturn, factors such as red tape was making it difficult for manufacturing.

"The message that we are getting from our members supports the results of the CBI survey. Small businesses were rightly pessimistic in the second half of 2001 and there are still challenges ahead but small firms are well placed to weather future difficulties. Small businesses now hold more money in business bank accounts than they owe in loans, and are better capitalised than they were during the recession of the early 1990s.

"We are concerned that it is small manufacturers who are suffering the most. This is because issues such as red tape, the climate change levy and deficiencies in business support impact most on small firms. It is about time that we saw some tangible results from the government's commitment to "think small first"," he said.