CBI warns of permanent damage to manufacturing from strong pound

The strong pound has wrought irrevocable damage on Britain's manufacturing heartlands, a leading business organisation warned yesterday.

The Confederation of British Industry said companies had slashed their workforces in a desperate bid to offset the exchange rate and stay competitive, rather than boost long-term productivity by investing in state-of-the-art equipment.

Its latest survey of the UK, done in conjunction with the consultants Business Strategies, found the strength of sterling - close to a 14-year high against key European currencies - had knocked manufacturers' confidence in seven out of 11 regions.

It said that even if sterling fell back, it would come too late for some regions. "We are looking at a smaller manufacturing sector in terms of employment even if orders come in," said Neil Blake, research director at Business Strategies.

The survey found that the regions where orders had grown were the ones that were cutting jobs at the fastest rate. The deepest cuts were in those regions with the greatest spare capacity - a sign that manufacturing was undergoing a one-off structural response to the exchange rate. "The lessons of history teach us that once the jobs have gone on this scale, then they are gone forever," Mr Blake said.

Sudhir Junankar, a senior CBI economist, added: "We have had the strength of sterling for some time, and this is a delayed response. It is not surprising that we would see a structural shift given the overcapacity."

Companies in every region of mainland Britain cut jobs in the first three months of the year. The reductions were led by the East Midlands, the North-west and the East of England - which enjoyed strong growth in orders. These were also the regions with the greatest overcapacity, and the only ones not to report a drop in business confidence.

Andrew Schofield, managing economist at Business Strategies, said: "Regions experiencing the fastest growth in orders are shedding jobs at the fastest rate. This indicates a drive to improve productivity as regions recover. If this is the case, job losses may intensify even as other regions pick up."

But he conceded that the link between falling employment and rising orders could be a sign that only those companies that cut costs were lean and efficient enough to retain their market share.

The survey will fuel the debate over whether industry has learned to live with a strong pound, or whether the exchange rate threatens to plunge the sector into recession.

The CBI's Mr Junankar said there were worrying signs the manufacturing sector had taken "a turn for the worse".

"Sterling's strength could now bring the manufacturing recovery to a premature end, and if sterling stays strong we are talking about the sector going into reverse," he said.

But the confederation stopped short of urging intervention through measures to weaken the pound or prop up the euro, calling instead for the Bank of England to keep interest rates on hold.

"We are not convinced that intervention would work," said Mr Junankar. "Our argument is more that, given manufacturers' problems and little sign of any price pressures, there is no case for further rate rises."

He also attacked the increasing burden of taxation and red tape on businesses, singling out the climate change levy as one important example of the way in which the Government was hindering industry's attempts to remain competitive.

The Bank of England today publishes its quarterly Inflation Report, which is expected to signal a more optimistic outlook for inflation and interest rates.