Oil, gas and steel costs could derail recovery, warns CBI

Businesses are facing a £5bn increase in their fuel bills this winter that could jeopardise the faltering industrial recovery, the head of the CBI will warn tonight.

Digby Jones will tell some 900 business leaders gathered for the UK's largest manufacturing event that the Government must avoid any moves that would lead to further price rises. His warning came as an independent forecaster said that oil prices alone could wipe 0.5 per cent off UK growth next year, undermining the Treasury's forecasts for another bumper performance.

Mr Jones will say that employers have been reporting average price rises for electricity and gas of some 40 per cent over the past year alone. Taking account of forecasts for winter prices, the cost of gas and electricity could rise by more than £5bn next year, he will warn. In addition, the prices of metals such as steel are more than 55 per cent higher than the same period last year. This comes hard on the heels of rises in the price of oil, which has soared by almost 75 per cent in the past 12 months.

"I am worried that rising costs will take the wind out of the sails of the manufacturing recovery," he will tell the CBI's national manufacturing dinner in Birmingham. He said ministers should take account of the pressure firms were under when setting the levels of carbon targets and business taxation in the Budget and next month's pre-Budget report. "If ministers do anything to harm manufacturers now, they will be scoring a real own goal," he will say.

Mr Jones will say that while the Government needs to meet climate change targets, it must also be based on a "fair carbon allocation" for key sectors such as electricity and manufacturing. Ministers must continue to resist damaging EU regulations on working time and employment of temporary agency staff, he will say.

His warning comes just days after the British Chambers of Commerce warned that the welter of new regulations was choking the recovery across business. David Frost, its director general, urged ministers to "just stop" imposing new red tape, singling out rules on access for disabled workers and year-long paid maternity leave. "The unions appear to have the ascendancy," he said.

Meanwhile the Ernst & Young Item Club, an independent forecast unit that uses the Treasury's economic model, said oil prices were causing the "occasional splutter". It said the economy was on track to post growth of 2.8 per cent, just below the bottom of the Treasury's 3 to 3.5 per cent range, assuming oil prices averaged $37 a barrel. It warned that if crude prices remained close to $50 a barrel this could take another 0.5 per cent off growth next year, leaving the Chancellor Gordon Brown well adrift of his target.

Professor Peter Spencer, its chief economic adviser, said: "This would be damaging for UK export prospects and UK inflation. But it would still leave us growing at a comfortable rate, close to trend ... This is a major contrast with the 1970s, when a similar type of shock would have knocked the UK economy for six."

The International Monetary Fund warned this month that oil prices posed the greatest threat to the world economy, while Mr Brown drew up a four-point plan to bring medium-term stability to the market.

Yesterday the Portuguese finance minister, Antonio Bagao Felix, said the world economy would suffer "disastrous" consequences if oil prices remained at current record high levels.

Bernard Dan, president of the Chicago Board of Trade, warned that oil prices could hit $75 a barrel. On Friday, crude closed at $54.93 a barrel in New York.