Higher energy costs and the bill for training and employing workers are putting British businesses under more pressure, yet most feel more upbeat about their future prospects than they did six months ago, according to new figures.
The survey by the Confederation of British Industry and the Regional Development Agencies, has found orders, output and jobs have continued to increase over the past year.
Firms have better expectations for the next twelve months with those in London and the North West the most upbeat, closely followed by Yorkshire and Humberside.
But the survey also pointed to a fall in their profits compared to the previous survey, with margins continuing to be squeezed by higher costs.
Staff costs were identified as the most significant upward cost pressure by companies, with 41 per cent saying it was their major pressure Ė rising to over half of firms in London and the east of England.
Energy was a close second, highlighted by another 33 per cent of firms, although in the south east, West Midlands and north east energy was the biggest cost pressure.
Asked about the main area in which energy costs were biting, more than half identified heating and lighting their premises, followed by the direct cost of energy as an input to their business processes.
Despite prices increasing across all the regions, only 11 per cent of firms were able to pass on all of these costs to customers and a third of businesses were unable to pass on any increases at all.
Regulation and red tape is still seen by nearly half of businesses as the greatest inhibitor to growth.
Inadequate support from Government is the second most important factor, named by 28 per cent of firms.
Shortage of finance and high labour costs are also cited by businesses as major factors, as is the cost of transport.
Jobs increased at a slower pace than was reported in the September survey. A balance of five per cent said employment was increasing, down from seven per cent six months ago. Nevertheless, a balance of nine per cent of employers still expected employment to increase over the next year.
The importance of a more highly skilled workforce to company competitiveness was reflected in the fact that training and retraining remained the most significant area for increased investment.
The same proportion of firms was funding training for employees as six months ago but a greater number said they intended to invest in training over the coming year (19 per cent) than in September (14 per cent).
Doug Godden, head of economic analysis at the CBI said: "The prospects for Britain's economy are brighter than they were six months ago.
"But at the same time, firms face a tighter squeeze on profits from higher energy and staff costs. Growth is also split across sectors so whilst finance and the services thrive, growth for retailers and consumer services is subdued.
"There are also signs that the long-awaited upturn in manufacturers' fortunes could be underway. But growth still falls short of rates we saw a few years ago and cost increases may not just damage profits, they could also hamper longer term investment and growth," he added.