Economists slash growth forecasts

LEADING independent economists have cut back forecasts of economic growth in the past month and expect national output to be lower this year than in 1991, according to a survey published yesterday by the Treasury.

City and academic economists expect gross domestic product to be 0.2 per cent lower this year than in 1991. Last month they were forecasting a 0.4 per cent rise. Predictions for 1993 growth have also been cut, by a fifth to 2 per cent.

Stagnant high street spending is seen as having suffocated the revival in manufacturing industry early this year. Official figures have shown factory output resuming its decline while surveys show manufacturers less confident about stepping up production as their order books weaken.

The forecasts of negative growth this year have brought independent forecasters in line with the Treasury, where some officials privately believe that recovery may not get under way until next year. Economists at City institutions are particularly pessimistic. On average they expect GDP to fall by 0.4 per cent this year, with a growing number predicting a fall of around 1 per cent.

The National Council of Building Materials Producers also warned yesterday that construction output would fall by 8 per cent this year rather than the 4 per cent predicted three months ago.

It said the expected recovery after the election had failed to materialise, particularly in the housing market, and recovery was unlikely until 1994.

Low consumer confidence and little hope of further interest rate cuts this year have forced the council to predict a fall in building materials output next year and 1 per cent growth in 1994.

In March it predicted flat output in 1993 with 2.5 per cent growth the following year. Some 50,000 jobs are expected to be axed in the construction industry on top of the 300,000 lost so far in the recession.

The council's gloomier view of the economy's prospects mirrored the Treasury's survey.

Despite forecasts of slower growth, the Treasury survey shows greater pessimism about the trade deficit than last month, with the current account deficit expected to widen to pounds 9.4bn this year. Independent economists are also more gloomy about unemployment and government borrowing than they were, but more confident about falling inflation.

Greater pessimism about economic recovery and increasing calls for the Government to consider devaluation or withdrawal from the exchange rate mechanism combined to put pressure on the pound.

The Bank of England and the Bank of Portugal bought sterling for escudos as the pound slipped below its so-called effective floor in the exchange rate mechanism, defined by its position relative to the strongest currency.

However, only small sums were involved and the pound remained around six pfennigs above its ultimate floor in the system.

The pound regained lost ground yesterday afternoon to close 0.15 pfennigs lower at DM2.8427, helped in part by Robin Leigh-Pemberton, Governor of the Bank of England.

He told a seminar that Britain's commitment to the ERM was an 'important and unwavering' part of the battle against inflation, and added that relaxing anti-inflationary policy would not help to restore the conditions needed for economic growth.

The money market remained fearful of a rise in interest rates. The three-month interbank lending rate remained at 105 16 per cent, more than discounting a quarter-point rise in base rates from their current 10 per cent.

Tensions within the ERM were exacerbated by growing fears the French will vote against ratification of the Maastricht treaty in September's referendum. The markets are as nervous about French opinion polls on Maastricht as they were about British polls before the general election.