CBI warns chances of recession now 50-50

THE CONFEDERATION of British Industry warned yesterday that there is a 50:50 chance of a recession as it slashed its growth forecasts for the economy and called for a further half-point cut in interest rates.

In its latest economic assessment, the employers' organisation painted a much gloomier picture of Britain's prospects than the Chancellor Gordon Brown.

The CBI's warning will be echoed today by the British Chambers of Commerce, which speaks for thousands of small firms across the country. It also wants the Bank of England to cut interest rates again before Christmas. "A further half point cut now is essential to keep recession off the agenda in 1999," said Chris Humphries, director general of the BCC.

Eddie George, Governor of the Bank of England, yesterday fuelled concern about the economy when he said that the UK's record trade deficit, announced on Wednesday, had been "germane" to the Bank's decision to cut interest rates earlier this month. "They [the trade figures] are a reflection of what is happening to external demand," he told MPs at the Treasury Select Committee.

Two of Mr George's colleagues on the Monetary Policy Committee insisted that lower interest rates were necessary to keep the economy on course.

Willem Buiter stood by his decision to vote for a 0.75 point rate cut at the MPC meeting a fortnight ago, while DeAnne Julius admitted that there was a possibility that economic growth could turn negative next year.

However, the Bank Governor gave mixed signals to the MPs, hinting that another cut in rates could be off the agenda until the new year. The Governor said: "The half per cent reduction in rates we made earlier this month we judged to be sufficient to bring retail price inflation back on track to 2 and a half per cent."

The CBI is forecasting that GDP growth will fall to just 0.7 per cent next year and then rise to 1.8 per cent in 2000. This compares with the Chancellor's forecast of 1 to 1.5 per cent growth next year and 2.25 to 2.75 per cent the year after.

Kate Barker, the CBI's chief economic adviser, said there was now at least a 50 per cent chance of a technical recession - two successive quarters of falling output. But she said the dangers of Britain suffering an outright recession of the kind experienced in the early 1990s were much lower.

Three months ago the CBI was forecasting growth of 1.2 per cent next year. But since then the economic situation has deteriorated further. The CBI's latest monthly industrial trends survey shows total order books at their lowest for six years and expectations on output at their lowest since 1991, making a recession in manufacturing increasingly likely.

"We face a major slowdown next year and the risks to growth are clearly on the downside while inflationary risks are slight," said Ms Barker.

"We need a further half-point reduction in interest rates at the MPC's December meeting to underpin consumer and business confidence."