THE key Scottish engineering sector has seen an improvement in conditions but still faces major export challenges in the eurozone and Russia, according to the latest research from its trade body.

The Scottish Engineering Quarterly Review for December, published today, outlines a bounce back from the poor trading recorded in the September publication.

A net balance, the number of companies reporting better conditions subtracted from those stating poorer ones, of eight per cent said their order intake was improving.

That was better than the -4 per cent recorded in the prior survey but still well below the more buoyant figures seen back to September last year.

The bounce seen in the most recent period was mainly due to smaller companies with medium and large businesses reporting a 0 balance.

Forecasts for orders over the next three months look positive with a 12 per cent net balance driven by small and medium enterprises.

Worryingly, output volumes across the sector in the December study were just one per cent, the lowest since March last year when a -3 per cent net balance was posted.

While small companies had a balance of three per cent and medium firms a 0 balance the output conditions for larger businesses appear to have worsened as they posted a -20 per cent balance.

There was however a stronger balance of 17 per cent when engineering firms were asked about output over the next three months.

Total UK orders showed an eight per cent balance which was an improvement from the -3 per cent recorded in the previous survey.

Although export orders remain in negative territory, the -6 per cent balance recorded was something of a rebound from the three-year low of -23 per cent stated in the September report.

Export sentiment has been in positive territory only once - during September last year - across the past three years.

Bryan Buchan, chief executive of Scottish Engineering, said: "All is not rosy in our garden however, with exports to the eurozone in particular suffering from the effects of a recession which has spread even to the powerhouses of Germany and France.

"The latest forecast data from the Bank of England suggests that interest rates and growth will continue to be suppressed for a protracted period.

"From the latest round of district meetings throughout Scotland, I have heard directly of the effect on the surprisingly significant number of our members who export to Russia. The country's general economic malaise is compounded by widening sanctions which are impacting on a range of Scottish-produced goods."

The research shows small and medium firms expect some improvement in exports across the coming three months but large firms still have a negative expectation of performance overseas.

Yet Mr Buchan was at pains to point out a number of factors have shown improvement across Scotland with staffing levels, optimism and investment intentions all rising.

According to the review employee numbers grew in the quarter across all sizes of companies with forecasts for the next three months remaining in positive territory.

Overall optimism across the industry showed a net balance of eight per cent as a result of sentiment in small and medium enterprises while larger businesses recorded a -20 per cent balance.

Investment in capital projects and training initiatives remained positive during the period.

Mr Buchan also highlighted the strong recovery the United States has continued to experience. He said: "As we know, what is good for the US can generally be good for us."