Rate cut call as manufacturing moves 'closer to recession'

A leading business organisation yesterday called for interest rate cuts and extra government spending as a new survey showed companies had suffered the worst period of economic activity for more than two years.

A leading business organisation yesterday called for interest rate cuts and extra government spending as a new survey showed companies had suffered the worst period of economic activity for more than two years.

The British Chambers of Commerce survey for the three months to June showed that the manufacturing sector was close to recession while the services sector had started to suffer.

David Lennan, director-general of the BCC, said the "shock waves of the global slowdown" had had a deeper impact on the UK economy than had previously been expected. "With manufacturing confidence draining away, the wings of service sector growth clipped and price pressures on a downward trend, there exists both the scope and need for a further cut in interest rates in August," he said.

"There is also scope for faster government support for areas that are clearly suffering and there is a need for that support to be targeted to areas that need the greatest help."

In the service sector, the index of sales growth fell to plus 26 from plus 31, while orders fell seven points to plus 19 from plus 26.

Transport, distribution and professional services were particularly hard hit due to their close links to manufacturers. Firms in the service sector in the West Midlands struggled in the domestic market while those in the East of England were hit by lower exports. The BCC added that firms in the North-west saw a dramatic fall as local business felt the impact of the foot-and-mouth crisis.

Economists said the report provided some ammunition for those pushing for a further interest rate cut. Ciaran Barr, chief UK economist at Deutsche Bank, said: "The message from the survey goes against the market belief that the next move in interest rates is higher, and supports our belief that it is too early to call the turn in the rate cycle."

However, yesterday's survey – which is the latest in a run to point to misery in the corporate sector – may still be outweighed by concern that consumer spending and confidence remain too strong and could risk inflation dangers in the medium term.

Michael Saunders, UK economist at SSSB, said: "This is not weak enough to prompt the MPC to cut again near term.

"They already have cut because of risks that growth will slow markedly, and the readings in this survey do not point to a sharper slowdown than the MPC already has been expecting."