CBI slashes forecasts for growth as consumer spending weakens

The CBI, the UK's largest employers' organisation, yesterday slashed its forecasts for economic growth this year, after new figures showed that consumer spending and the manufacturing industry had both weakened.

The CBI, the UK's largest employers' organisation, yesterday slashed its forecasts for economic growth this year, after new figures showed that consumer spending and the manufacturing industry had both weakened.

The sluggish state of the world economy, on the back of the turmoil on the stock markets and repeated accountancy scandals, prompted the CBI to cut its forecasts for UK growth to 1.5 per cent – the weakest for 10 years – from 1.7 per cent just three months ago.

The grim outlook came as its own survey showed that industry was still seeing orders fall while official figures showed that retail sales made only a modest recovery in July.

The CBI expects household spending and business investment to slow and unemployment to rise while inflation will stay below the Government's target for two years – a cocktail that would appear to point to a cut in interest rates.

Ian McCafferty, the CBI's chief economist, said: "The chances and justification for a rate cut are rising. But if I were the Bank I would want to see more evidence the world recovery is faltering."

In its monthly survey, also published yesterday, the CBI said on balance a quarter of companies said orders had fallen, marking no improvement from June's figure.

"In recent months manufacturers have become more doubtful about the speed of the world economic recovery," Mr McCafferty said. "Stock market volatility and poor economic news continue." He said businesses still needed to work off the debt overhang from the mid-1990's boom, and said executives needed to be "patient" in waiting for the rebound.

The Bank of England has cut rates from 6.5 per cent to 4 per cent, a 38-year low, to stimulate consumer spending to offset the manufacturing decline. But two months of falling retail sales volumes – in May and June – prompted fears that shoppers were running out of steam. Analysts had hoped for a sharp rebound in July as Britain returned to normal after the World Cup and Jubilee celebrations.

The Office for National Statistics said sales volumes rose 0.3 per cent, disappointing forecasts of a 0.6 per cent rise. On an annual basis, the rise of 4.5 per cent was the worst for 18 months. Sales at department stores dropped 1.8 per cent, the biggest monthly decline since April 2000 while sales of "big ticket" items fell 0.9 per cent.

Economists are wary of drawing strong conclusions during such a volatile time and some believe the Bank will wait until September or October to get a clear picture. David Page, UK economist at the finance house Investec, said the Bank's Monetary Policy Committee would be "unwilling" to conclude the consumer boom was over. "However we believe August sales will continue in a soft vein and the housing market should help confirm this trend.

"Should manufacturing suffer a further setback we would expect the Bank to cut rates and, on balance, we see the Bank cutting rates by a quarter-point to 3.75 per cent in the fourth quarter."

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