Nervy industry cautions against early rates rise

The Confederation of British Industry sounded the alarm over the faltering world economic recovery yesterday as it warned the Bank of England against a hasty rise in interest rates.

Industry is struggling to climb out of recession and is still too weak to absorb higher rates, said Ian McCafferty, the CBI's chief economist.

"It is too early to say that the manufacturing sector is already out of the woods," he said. "It has turned the corner but the recovery will be a long and drawn-out process and is certainly not assured."

The nervous state of manufacturing, disclosed in the CBI's latest snapshot of its members, was the result of fresh jitters about the international outlook, Mr McCafferty said.

"The optimism in many quarters over the United States' recovery earlier this year may have been premature," he said. "The outlook seems much less certain than six or seven weeks ago."

The survey showed a slight improvement in export orders last month and in overall order books but firms have scaled back expectations of a sharp jump in output.

"The trend is positive but progress is slow," said Geoffrey Dicks, UK economist at Royal Bank of Scotland. "There's still not much life in UK manufacturing."

Margin for error


In a further sign that many companies are still hesitating about committing funds to new projects in the current depressed environment, business investment fell by 1.1% in the first quarter, according to figures published by the Office for National Statistics.

Separately, the CBI cast doubt on the chancellor's fore cast for growth of between 2% and 2.5% this year rising to between 3% and 3.5% next year.

It is forecasting much weaker growth of 1.7% this year and 2.7% in 2003 which could have a "significant impact" on government revenues.

While the chancellor will still meet his golden rule of keeping the current budget - adjusted for the economic cycle - in surplus, the CBI said he had much less margin for error on their forecasts than on the Treasury's.

The weakness of the recovery should ensure that borrowing costs remain close to their current 38-year low of 4%. The CBI is forecasting a rise in interest rates to 4.25% by the end of this year, and to 5.25% by the end of 2003.

Mr McCafferty said that the £4bn increase in payroll taxes announced in the Budget was likely to push up unemployment.

"Competitive pressures are still intense, and under those circumstances, firms can't pass on higher costs into higher prices so it will have to come off margins or through even tighter cost controls," he said. "It will affect profits and job creation."