CBI gloom on jobs and exports ends run of good news: Chancellor urged to consider rate cut - Survey shows fall in business optimism - Warning on European recession

THE RECENT run of good economic news came to an abrupt halt yesterday as the Confederation of British Industry forecast that 40,000 factory jobs would be shed between July and September and urged the Chancellor to consider cutting interest rates again.

'Warning signals are now emerging about the strength of the upturn,' said Andrew Sentance, the CBI's chief economist and one of the 'seven wise men' who advise the Chancellor.

The CBI said the outlook for exports had worsened as Britain's European markets had slipped deeper into recession, a problem that had been exacerbated by the recent strength of the pound.

The July CBI survey of manufacturers showed the proportion expecting export orders to rise in the next four months tumbling since April.

The survey also showed a big fall in business optimism since April, which the Treasury argued was normal for the time of year. Optimism about exports also dropped significantly. Factory orders and output rose modestly over the last four months, with smaller increases now expected.

Mr Sentance said the survey cast doubt on the economy's ability to maintain for the rest of the year the rapid growth seen in the past six months.

He said the need for a cut in interest rates was 'finely balanced', but the survey and the further rise in the pound since its completion suggested it might be needed.

Howard Davies, CBI director-general, said: 'Because the pace of growth is slow, manufacturers are still not confident enough to increase their investment in plant and machinery. That is clearly a matter of concern for the sustainability of the recovery.'

Roger Bootle, Midland Bank's chief economist, said the survey was 'very weak'. He added that it would put pressure on the Chancellor to cut base rates again from the current 6 per cent, especially as rates elsewhere in Europe were soon likely to fall further, either to save the European exchange rate mechanism or as a result of its collapse.

The survey is one of few signs of economic weakness to emerge in recent weeks. Official figures have shown factory output and high street spending up sharply, though they may have been boosted by inappropriate seasonal adjustment and deep price-cutting.

The stock market shrugged off the CBI survey, taking cheer from the cut in German interest rates expected tomorrow.

The FT-SE 100 share index closed 35.2 points higher at 2,879.4, its biggest one-day increase in more than 11 weeks. But the ERM had another nervous day, as markets awaited the German rate cut. The French franc edged slightly farther away from its floor, but the Spanish peseta and Portuguese escudo were hit as fund managers sold the currencies.