CBI: Brown was right on growth

Industry leaders yesterday said that further interest rate cuts will be needed to safeguard Britain's fledging economic recovery unless the pound falls against other world currencies.

The Confederation of British Industry says the economy is heading for a "smooth take-off" in 1999 and has revised upwards its forecast for growth this year by 0.4 percentage points, to 1.2%.

Kate Barker, the CBI's chief economist, admitted that the treasury had got it right last November when it forecast growth of between 1% and 1.5% - a figure which was dismissed by many commmentators as too optimistic.

But she warned that it was far too soon for the Bank of England to consider raising rates, an option which the Bank's monetary policy committee discussed last month.

"The economy has just shifted out of first gear, and now is not the time to start applying the brakes," she said.

"Favourable inflation prospects indicate there is no need to raise interest rates."

The CBI also unveiled its latest monthly snapshot of industry which showed that factories are poised to increase output at the fastest rate for more than two years.

"Manufacturers can take some heart from these findings, but export order books are still far below normal and there is continuing downward pressure on prices," said Sudhir Junankar, CBI associate director of economic analysis.

The CBI expects manufacturing output to fall by 0.4% over the year, and that the shake-out in manufacturing jobs will continue.

Total orders remain weak, but fewer firms are reporting reduced order books. "The recovery in the domestic economy is easing the pain of the high pound," said Michael Hume, UK economist at Lehman Brothers.

"The pick-up in overseas demand, especially in the euro area and Asia, is beginning to soothe wounds from earlier [in the year]."

A robust bounce-back in household spending this year is behind the CBI's revised growth forecast. But Ms Barker said the strength of the recovery depended on sterling falling from its present 2.90 German marks to around DM2.70. "There will be a need for further cuts if sterling stayed strong," she added.

Ms Barker said that many of the weakest manfacturers had gone to the wall and the remainder were learning to live with sterling's strength.

The CBI would still prefer a lower rate, of around DM 2.65, set for entry into the single currency - some 30 pfennigs higher than the entry rate industry leaders were calling for 18 months ago.

There are no signs of inflationary pressures in the economy, says the CBI. It is forecasting that the Bank will continue to undershoot its 2.5% target for inflation for the next 18 months. Its August survey shows goods prices are set to fall over the next four months.

The CBI expects unemployment to stabilise at around 1.8m on the government's prefered measure, based on the labour force survey. But while overall employment will rise by 160,000 during 1999 and 2000 due to robust growth in services, manufacuters are expected to cut 130,000 jobs over the same period.

Despite predicting a small rise in public borrowing this year, the CBI says the chancellor, Gordon Brown, will comfortably meet his targets for controlling public finances.