Case is growing for a rate cut, says CBI

Britain's leading employers' organisation yesterday said the case was growing for a cut in interest rates to stimulate the flagging economy after cutting its forecast for UK growth this year to just 1.5%.

The Confederation of British Industry blamed the faltering global economy and tumbling share prices for its gloomier view about the prospects for the UK, saying recovery would be slower and more protracted than had been expected.

Ian McCafferty, the CBI's chief economist, said: "The justification for a cut in interest rates is increasing. In the past four to six weeks we have had an awful lot of bad news."

He added that the Bank of England was unlikely to rush into a decision and would probably need more evidence of the weakness of the global economy before acting. "But the lack of inflation suggests another cut might be justified," he said.

The CBI has scaled back hopes of a brisk recovery in the economy that were prevalent earlier in the year, when there was optimism that the global economy would bounce back rapidly from the twin setbacks of the recession in the United States and the terrorist attacks on September 11.

In its latest snapshot of manufacturing, the employers' organisation found that the improvement in both domestic and export order books seen earlier in the year had petered out.

Output from Britain's factories is expected to pick up slightly over the coming months as firms replenish their stocks, but the CBI said the ferocious squeeze on profit margins would be maintained by a further period of falling prices for manufactured goods. With manufacturing output now expected to contract by 3.3% this year following last year's 2.3% decline, and consumer spending growth showing signs of moderating, the CBI said that the prospects for growth were now weaker than they had been three months ago.

"Global uncertainty has weakened the UK economic outlook. Predictions of a speedy US recovery have failed to materialise, and recent stock market volatility and corporate scandals have increased uncertainty at an already fragile time", said Mr McCafferty.

"This recovery, in the UK and internationally, is likely to be slow going. The global economy is still working off the excesses of over-investment and rising levels of debt of the late 1990s. This is a necessary prelude to a stronger, more sustainable recovery. Companies will need to be patient and maintain realistic expectations for some time to come."

The CBI believes that the economy could perform even more sluggishly than it is predicting, citing anecdotal evidence from its members that over the past two months orders from the US have dried up. It fears that the world's biggest economy could be about to enter a new phase of weakness, with spillover effects for the UK.

Its economic forecasts for 2002 and 2003 show that higher public spending will underpin growth of 2.7% next year, with consumer spending held back by high levels of personal debt and rising unemployment. For the CBI, the first increase in base rates is now not pencilled in until early next year.

Manufacturing is expected to record its first rise in output in three years, but investment in new plant and machinery is forecast to drop for the third successive year. Corporate profits are predicted to remain flat next year, reinforcing the weakness of share prices. "The stock market is going to find it hard going," said Mr McCafferty.

"The lack of pricing power on the part of companies means that the focus will be on cost control and cutting jobs. This focus will drive market sentiment. Profitability will remain very squeezed."