Slump in demand raises prospect of interest rate cut

Business leaders hammered home their opposition to increases in interest rates or taxes yesterday after figures showed that Britain's factories and high streets suffered their worst slump in demand for a decade.

Speculation that the Bank of England will be forced to cut rates despite its worries about inflationary pressure rose yesterday as analysts said evidence was mounting of a widespread economic slowdown.

The Bank's Monetary Policy Committee voted to leave rates on hold at 4.75 per cent yesterday, but traders rushed to place bets on a cut before the end of the year.

Manufacturing output slumped 1.6 per cent in March, according to government figures, while retail sales were almost 5 per cent down in April on a year ago, an industry survey showed.

"Consumer confidence is very weak," Kevin Hawkins, the director general of the British Retail Consortium (BRC) said. "The benefits of a reduction in rates are becoming ever more apparent and the Bank cannot continue to dodge the issue."

The Conservatives seized on the factory data, saying they were "further proof of Labour's failed business policies" - a claim rebutted by the Government. The slump could cut first-quarter economic growth to 0.4 per cent - below trend - from the current estimate of 0.6 per cent, threatening to derail Gordon Brown's optimistic growth and tax revenues forecasts.

The CBI moved to head off tax rises on businesses to fill any shortfall, saying it would resist them "fiercely". Sir Digby Jones, its director general, said: "This is further evidence that any tax raid on business from the newly elected government would hit a manufacturing sector already in a fragile state."

The 1.6 per cent fall in factory output in March was the steepest since January 1995 - excluding the factory shutdowns for the 2002 Queen's Jubilee.

The Office for National Statistics said the decline was "widespread", with 12 of the 13 sub-sectors of manufacturing suffering a fall. The drop was led by a 4.6 per cent slump for pharmaceutical companies, adding to fears in the wake of job cuts by Marconi and IBM that the UK's high-tech sector is in decline.

An ONS statistician said: "Over the past few months ... some sub-sectors have been doing well and propping up manufacturing, and when they take a downturn it shows up."

He said the fall did not include any impact from the collapse of Rover, which could knock at least 0.1 percentage point off output.

The gloom was exacerbated by a BRC survey showing sales volumes fell 4.7 per cent in April on a like-for-like basis compared with a year ago, the steepest fall since it started collecting data in 1995. It said sales worsened across the board but especially for discretionary items, non-essentials and big-ticket items such as white electrical goods and furniture.

Sterling tumbled across the board as traders bet the next move in rates would be down. Roger Bootle, at the accountants Deloitte, said: "With rate rises now largely off the agenda, attention will soon turn to when the Bank is likely to start cutting rates."

But others said the Bank was rightly worried about inflationary pressures from the labour market and the factory floor. Separate ONS figures showed prices of factory goods rose rose 3.2 per cent on the year to April.

Martin Weale, at the National Institute of Economic and Social Research, said the Bank should concentrate on inflation. "We have had substantial inflationary pressures, most obviously from oil," he said.

OUTLOOK, PAGE 63