CBI slashes its growth forecast as exports fall

The strong pound has led the Confederation of British Industry to slash its forecast for growth this year. The latest survey of trends in industry by the employers' organisation reported a fall in export orders, although manufacturers' total order books were unchanged.

But the growing gap between manufacturing and the rest of the economy was highlighted by a rise in consumer confidence to its highest level since August 1988. This followed news earlier in the week of a rebound in high street sales last month.

Expert opinion was just as divided. David Bloom, an economist at broker James Capel, said: "The broad trend in the economy is up. Not raising interest rates now is storing up trouble for the future."

But Dharshini David at HSBC Markets predicted a fragile manufacturing recovery, with the CBI survey pointing to a possible dip in output this month. The CBI trimmed its forecast for growth in 1997 to 2.8 per cent from 3.1 per cent, making it one of the most pessimistic predictions for the economy this year. Weaker output, investment and exports account for the reduction.

Sudhir Junankar, the CBI's associate director of economic analysis, said: "The main uncertainty around our forecast remains the level of sterling, which has risen sharply since last summer and is set to hold back the growth in manufacturing and exports this year."

The latest monthly survey of manufacturers found a drop in export orders, with the balance of firms reporting higher orders down to minus 12 per cent from minus 8 per cent. The total order book was unchanged between last month and this, however.

Manufacturers' output expectations increased for the second month running following a fall in December. "However, firms remain fairly upbeat about stepping up production in the coming months, as home demand for manufactured goods continues to hold up," Mr Junankar said.

The clearest sign of the impact of the strong pound came in lower expected price rises. Although prices normally slow after the traditional January increases, the balance expecting to raise rather than reduce prices dropped sharply from 16 per cent to 4 per cent.

The CBI still expects interest rates to rise by half a percentage point after the election, and the reason could be seen in yesterday's consumer confidence survey.

The survey, carried out for the European Commission by GFK, showed confidence on a rising trend and back at its highest level since August 1988. Optimism about prospects for the economy dipped slightly but this was more than offset by a surge in optimism about personal finances. This was especially pronounced among young people.

"With building society windfalls in the pipeline, confidence can only improve further," said John O'Sullivan, an economist at NatWest Markets.