Rate cut needed to boost industry, CBI says signals confidence remains

British manufacturers experienced a slight upturn in output in the last quarter, the CBI said yesterday, but it warned that "big question marks remain" for the sector as confidence remains weak.

Official data last week showed that manufacturing had entered a technical recession, defined as two quarters of contraction.

The CBI was less downbeat. The percentage of those reporting higher output over those reporting a fall rose to -1 in June from -10 in April. But the confidence balance fell to -16 from -15, the fourth consecutive negative figure.

"Our results reinforce the case for a cut in interest rates on August 4," said Ian McCafferty, CBI chief economist. "I wouldn't be surprised at another cut later in the year if international conditions remain difficult."

The survey also showed that manufacturers were suffering a continued lack of pricing power. The average domestic selling prices balance fell to -8 from +12 last quarter, marking the first price cuts since last year.

Input cost rises were at their slowest pace for 15 months despite the recent spike in oil prices that sent crude over $60 a barrel.

New orders were down for the third straight quarter, although the decline is not as severe as the previous quarter. Exports largely salvaged manufacturing firms last quarter as they were able to take advantage of a weakened pound against the dollar.

The CBI noted rapid growth in exports in the mechanical engineering and transport sectors, although car production still decreased by 4.9% last month, according to the Office for National Statistics.

Manufacturers' expectattions for orders have been scaled back for next quarter to the lowest since July 2003 and firms predict that a further 18,000 jobs could be lost in the coming months. Thirty-three percent of firms expressed less confidence in the next quarter while only 17% said they were more confident.

"The forward-looking balances of the quarterly survey still look quite gloomy," said Paul Dales at Capital Economics. "Manufacturing costs [are] rising at a 19-year high and demand is still weak."

Doubt remains about further repercussions from the London bomb attacks. The CBI analysed data after July 7, which suggested there was limited impact.

"Retail showed some slowdown, particularly in central London in the week following the first attack," said McCafferty. "But the impact has been small in terms of confidence and supply."