Industry outlook lifts confidence

THE Confederation of British Industry will report tomorrow that manufacturers' optimism about the general business situation has improved sharply.

The CBI's latest quarterly Industrial Trends survey coincides with a Gallup poll showing consumer confidence is also reviving.

Both surveys will be greeted with relief in Whitehall. Ministers were dismayed last week by the gloomy evidence about the state of the economy late last year.

The CBI survey, taken at the beginning of the month, will also reveal that manufacturers expect the volume of output to pick up in the next four months. However, the advance is understood to be too modest to signal a firm recovery in manufacturing output.

In the December survey, a balance of minus 7 per cent of respondents thought their output would improve in the next four months. The latest survey reveals an improvement on this result, but one that falls short of the plus 7 or 8 per cent calculated by the CBI staff as signalling a decisive recovery in the past.

However, optimism over the general business situation is understood to be sharply better than the minus 23 per cent recorded in the previous quarterly survey in October.

The authoritative CBI poll will reinforce the findings of last week's quarterly survey from the British Chambers of Commerce. This found that confidence among both manufacturers and service companies shot up to levels unseen since since last April.

The CBI survey follows the latest EC-Gallup poll on consumer attitudes which showed that general confidence rose sharply in January, the third successive monthly rise.

The latest survey evidence may tip the balance against an early Treasury decision to authorise a cut in interest rates, despite a batch of gloomy evidence on the economy last week. December unemployment surged by 60,800 to within a whisker of the politically explosive 3 million mark. Treasury officials believe it will exceed 3 million when the January figures are released next month.

Despite anecdotal evidence of improved high street sales, official figures showed December retail sales sank 0.7 per cent and manufacturing output dropped 0.5 per cent in November.

The figures helped to bring the fall in sterling over the past two weeks to 8 1/2 pfennigs, although during the period the pound declined just 2 per cent on a trade-weighted basis, thanks to a weak dollar. On Friday, sterling closed at DM2.4374 and stood at 79.8 per cent of its 1985 value against a trade-weighted basket of currencies.

Some senior Treasury officials are known to be worried about the latest fall in the pound and would like any excuse to recommend a 'wait and see' policy on interest rates.

City analysts believe much will hinge on the January inflation data, released next month. Fears that the effects of the steep devaluation of the pound will start to feed through to the retail price index will need to be calmed before the authorities can act.

However, a number of City economists remain convinced that the dangers of an extended recession greatly outweigh worries about inflation.

Christopher Huhne, page 10