Industry pleads for rate cut to head off recession

Britain's industrial leaders yesterday urged the bank of England to cut the cost of borrowing again this week to prevent a full-blown recession in manufacturing spilling over into the rest of the economy.

Slashing its growth forecasts for the year and warning that a six-month-old recession in manufacturing would last the rest of 2001, the Engineering Employers Federation demanded a 25-points cut in interest rates when the bank's monetary policy committee meets tomorrow.

Digby Jones, CBI director general, told a London audience, including Sir Eddie George, the bank's governor, a quarter-point cut (to 5%) now would "help keep the wind in the sails of the UK economy."

City analysts expect the MPC to leave rates on hold despite EEF warnings that 40% of the overall UK economy, not just manufacturing, is already in contraction and that the deteriorating global economy threatens British unemployment and consumer confidence.

The case for resistance to further cuts in the cost of borrowing was strengthened when Wim Duisenberg, European central bank president, issued a clear signal that the ECB would keep Europe's rates at 4.5% tomorrow.

German economic data, including unemployment and industrial output, due out the same day are expected to show a sharp downturn but Mr Duisenberg said there had been no new information since the last rate cut on May 10 to justify a change.

Last night Mr Jones said: "Companies say the world economic slowdown is looming large over businesses in the manufacturing and service sectors. The Bank of England needs to soften this impact by taking rates down a notch. We recognise that consumer demand remains robust but overall our analysis shows there is no real risk of overshooting the [2.5%] inflation target."

But Stephen Radley, EEF chief economist, offered a gloomier assessment, with engineering growth revised drastically downwards from 3.2% a quarter ago to 0.7%, the lowest since 1993.

Manufacturing as a whole, the EEF said, in a sharp reversal of its last quarterly survey, would grow just 1% this year and shed 153,000 jobs, including 56,000 in engineering.

"It's a mistake to believe the UK economy alone is powering ahead on all fronts," Mr Radley said. "The state of the world economy will further stifle growth. Services will dampen inflation, with oil prices coming down, and consumer confidence will start to weaken once unemployment begins to increase."

The EEF survey showed the sharpest reversals in fortune for electronics and electrical equipment, with growth in electronics, mainly in the south-east, south-west and Scotland, down to 2.4% this year against 17% in 2000.

Engineering group IMI underlined the deteriorating conditions in the sector by warning that first-half profits to June would be 10% down on last year and worse was to follow, prompting brokers to scale down full-year, pre-tax earnings forecasts from £137m-£140m to £123-£125m.

The Institute of Management, meanwhile, bucked the trend with a survey showing 63% of managers urging the MPC to keep rates on hold.