A jump in domestic orders helped pull UK factories out of almost two years of contraction last month, according to a leading business survey.

Output from the manufacturing sector improved to a 20-month high in March, marking the end of a period of shrinking activity that started in July 2022.

Giving further evidence that Britain is beginning to recover from last year’s downturn, which drove the economy as a whole into recession in the second half of 2023, the S&P purchasing managers index (PMI) hit 50.3 – a figure above 50 indicates expansion.

The index monitoring new orders rose to 50.2 in March, up from 45.4 in February. Rob Wood, the chief UK economist at Pantheon Macroeconomics, welcomed the data, saying: “The long downturn in manufacturing output is over according to the PMI.”

Factory owners had a difficult 2022 and 2023 and while domestic demand for manufactured goods has picked up, businesses continue to experience global difficulties that have restricted foreign orders.

However, S&P said hold-ups in the main shipping lanes through the Middle East amid attacks by Yemeni Houthi rebels on international shipping in the Red Sea were a cause for concern.

“March data signalled that the mild uptick in new business inflows was centred on the domestic market,” it said. “The trend in new export orders remained weak in comparison, with overseas demand falling for the 26th successive month – albeit at the slowest pace since April 2023. Companies reported reduced demand from mainland Europe, with specific reference to France, the Netherlands, Belgium and Poland.”

Manufacturers continued to shed jobs in March, but at the slowest since last May, with the employment balance rebounding to 48.0 from 43.3 in February.

Imports of raw materials and parts needed to complete the manufacturing process also contracted for a 21st month in a row, but at a slower pace.

Rolls-Royce was among a string of companies to show a strong rebound in orders and sales earlier this year, improving profits. Car companies have also staged a recovery after a long period of declining sales.

Wood said: “This isn’t just a flash in the pan, with the forward-looking indications from the PMI suggesting growth will improve further.”

Expectations for growth in output over the next 12 months improved to 75.9 in March from 73.5 in February, above their average level of 72.4 since manufacturers were first asked about this in 2012 and the highest since April last year.

Export orders continued to fall, but the rate of decline eased. S&P said the index tracking new export orders improved to 47.8 in March from 44.2 in February.

James Brougham, the senior economist at the manufacturers’ lobby group Make UK, said the figures showed “manufacturing can return to a growth footing despite a challenging business environment”.

He said firms were battling the effects on trade from Red Sea disruptions and the extra costs of high interest rates.

“Nevertheless, manufacturers are now hardened to the disruptive business environment they have had to endure over the past four years,” Brougham said. “Despite the ongoing domestic political uncertainty, which is putting the brakes on investment decisions, this resilience means they are well placed to make the most of improving conditions in the year ahead.”