Growth has slowed sharply to its lowest rate for 15 months and business optimism has fallen for the first time since 1992. These unexpectedly gloomy results from the latest Confederation of British Industry survey remove any lingering risk of an increase in base rates when the Chancellor, Kenneth Clarke, meets Eddie George, Governor of the Bank of England, tomorrow.
City economists said the slowdown might persuade Mr George to withdraw his advice for a base rate rise. Michael Saunders, UK economist at the investment bank Salomon Brothers, said: "This is the single most important piece of information about the economy since the last monetary meeting."
The Governor will also take to tomorrow's meeting the Bank's new inflation forecast, due to be published next week. This is expected to be slightly less gloomy than the May report, which predicted inflation approaching the 4 per cent ceiling early next year.
Published minutes of the May and June meetings show that Mr George referred to the buoyancy of earlier CBI survey results when recommending higher interest rates. His advice is believed to have been the same at the beginning of this month. The latest survey brings the CBI's figures more closely into line with very weak official statistics for manufacturing output.
Andrew Buxton, chairman of the CBI's economic affairs committee, said: "Clearly, interest rates should not rise, but equally there is no justification for a cut. We should sit on the fence and see if the downturn is real or just a blip."
Another sign of the retreat of inflationary dangers was a significant rise in manufacturers' investment intentions. The weakness of industrial investment has been one of the disappointments of the recovery.
But the balance of firms planning to invest in plant and equipment is the highest since April 1989, with the investment directed towards expansion of capacity. Mr Buxton said: "This improvement will need to be sustained if we are to expand our manufacturing base and narrow the investment gap with our major competitors."
The survey suggested that immediate price pressures have stabilised, even though costs have risen by more than expected. The balance of firms expecting to raise prices was unchanged in July and well below the January peak.
The CBI said competitive pressures were forcing firms to squeeze profit margins rather than raise prices. The next few months seem likely to squeeze margins further. New orders increased by less than expected and at the slowest rate since early 1994. This mainly reflected a steep drop in domestic demand.
Export growth slowed in the three months to July compared with the previous quarterly survey but remained stronger than domestic orders. Seasonal effects exaggerated the weakness of the survey results, but even after adjusting for the seasonal ebb and flow of business optimism, there has been a dramatic fall in confidence so far this year.
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