SME manufacturers saw output and domestic growth grow in the three months to January, while export activity remained flat, according to CBI research.
The CBI SME Trends Survey found domestic orders rise for the sixth quarter running.
Domestic business and output are expected to grow at a slightly stronger pace in the next three months.
However, the research - conducted with 437 small and medium-sized manufacturers - disappointed expectations of a modest rise in exports.
The survey showed the highest level of concern over the impact of export levels since 2013.
Despite this, smaller manufacturers were more optimistic about their overseas prospects this year, at +4 per cent from -6 per cent last quarter.
The rate of growth in employment slowed for the second consecutive quarter, but remained positive. Looking ahead, smaller manufacturers plan to invest more in plant and machinery and buildings over the next year.
Rain Newton-Smith, CBI director of economics, said: “Smaller manufacturers are continuing along a steady growth path, with domestic orders and output both rising at a healthy pace.
“The sharp fall in the oil price should also help, pushing down the cost of production and raw materials for firms.
“But stagnant export orders are dragging on the sector’s performance, mainly because of the sluggish recovery and growing uncertainty in the eurozone.
“Quantitative easing should inject some new life into eurozone economies but it won’t be a miracle cure and businesses will have a close eye on Greece, as the new government sets out its agenda.”