Small firms group ISME has described itself as "bullish" about prospects for the economy in 2005, particularly employment.

Its final quarterly business trends survey of 2004 noted that sentiment was improving strongly among its members and 25,000 new jobs could be created in their sector next year. Many of these would be filled by people from overseas, said the group.

The organisation said 2004 was "in general" a good year for the small business sector, with business confidence levels extremely positive over the past few months.

But ISME chief executive Mr Mark Fielding said the organisation was "bullish" about the year ahead. He said this was based on the fact that 30 per cent of companies were more confident about business prospects than they were 12 months ago.

ISME said employment prospects were particularly encouraging, with an exceptional 41 per cent of companies planning to increase employment in the next 12 months in comparison to 8 per cent who indicated a reduction.

"These figures confirm that the SME sector will be to the forefront of employment creation in the next number of years. Encouragingly, the manufacturing sector has shown a significant recovery, with one-fifth of companies overall anticipating future job creation... Only a net 3 per cent of manufacturing companies increased employment in 2004," said Mr Fielding.

ISME said it was confident the SME sector would create 25,000 jobs in the next 12 months.

Business costs continued to be a burden for SMEs, the survey noted. Cost increases were reported across a range of areas, including rents, wages, raw materials and energy, with many firms paying in excess of 5 per cent in these production costs in the past 12 months.

Respondents identified labour costs as the biggest threat to their development and growth. ISME said this was not surprising as the majority of companies were labour intensive and had experienced increases of 20 per cent in their salary rates in the past two years.

"Improved optimism is particularly noticeable in the manufacturing sector, which, while continuing to lag behind other sectors, has seen a considerable turnaround in the past 12 months from a position of pessimism and negative employment forecasts."