Manufacturing activity slowed in the first quarter of 2008, but companies remain fairly optimistic about the future despite rising raw material costs and a drop in domestic demand, a survey showed on Monday.

The Engineering Employers' Federation (EEF) survey showed a total manufacturing output balance of +15 in the first quarter, down from +27 in the previous quarter but still above the long-term average.

"There is still confidence about the near-term future," the EEF's chief economist Steve Radley told Reuters in an interview.

The total new orders balance slipped further to +14, from +21 in the previous quarter, mostly due to a lessening of domestic orders. The exports balance dipped slightly to +13 from +16.

A weaker pound helped exports to support sagging domestic demand across most manufacturing sectors, excluding electrical equipment, and optimism still pervades the manufacturing industry.

Almost two-fifths of companies expect both output and orders to increase in the next three months, with a slim majority of firms saying they will invest further, and some expected growth in employment.

Profit margins have been tightening for manufacturers in recent months, as a lag develops between raw material price rises and end-product inflation.

"A lot of companies are saying they are not able to pass through cost rises," Radley said, adding that wage inflation had also been kept in check.

"There is no evidence that pay deals are picking up significantly. Companies are keeping pay awards around 3 percent," he said.