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CBI forecasts inflation on target

Interest rates: Markets believe that UK interest rates have peaked as 'new atmosphere' spreads across Europe

Economics Editor

The Confederation of British Industry has warned that interest rates will still have to rise by half a percentage point if the government is to come "within hailing distance" of the government's inflation target. The CBI also believes that tax cuts in the November budget could could stoke up inflation.

Tax cuts larger than pounds 2bn "would run inflationary risks" said Kate Barker, the CBI's chief economic adviser, presenting its latest quarterly forecast. The danger was that it would lead to upward pressure on prices from consumer spending growing too fast next year.

The CBI is forecasting that consumer expenditure will grow at nearly 3 per cent next year even in the absence of tax cuts. This is expected to ensure that any slowdown to growth caused by destocking in the next few months will be temporary.

"The hesitancy in the economy will be short-lived," said Sudhir Junankar, associate director of economic analysis. However, it has led the CBI to cut its forecast for growth this year to 2.9 per cent compared with the 3.3. per cent it projected in May. Manufacturing output growth has been slashed to 2.2 per cent from the 4.3 per cent forecast just three months ago.

"The recovery in manufacturing is slowing," said Mr Junankar, presenting the latest monthly survey of where industrialists think the manufacturing economy is going.

Althogh the balance of industrialists expecting output to rise had increased marginally in August, this was consistent with a developing picture of a weakening manufacturing sector.

The industrial slowdown reflected less buoyant demand conditions in overseas markets and subdued domestic orders. The balance of industrialists reporting above normal export orders in August was still positive at 7 per cent but was lower than at any time this year.

In line with this, the CBI has downgraded its forecast of export growth in 1995 from the 8.2 per cent it predicted in May to 6.7 per cent.

Output price expectations were "more encouraging than at any time in the past year," said Mr Junankar. "The peak had been passed." Competitive pressures were still strong and this would help to abate inflationary pressures.

The CBI has increased its forecast for investment growth in 1996 to 5.3 per cent. It believes that manufacturing investment will be particularly strong in both years, at 11 per cent in 1995 and 9 per cent in 1996. However, it has drastically reduced its projection for growth in company profits in 1995 to 1.5 per cent from the 7.1 per cent that it was predicting in February.

The main downside risk to the central forecast for economic growth was destocking.

CBI Economic Forecast

May 95 Aug 95 Aug 96

change on previous year

Total GDP 3.3 2.9 2.8

Mfg Output 4.3 2.2 4.0

Consumer Spending 2.4 1.6 2.7

Mfg Investment 10.6 10.8 9.4

Exports 8.2 6.7 6.1

RPI 3.9 3.7 3.0

Unemployment 2.1 2.3 2.1

Company profits 7.1 1.5 3.0

Source: CBI