Sterling delivers triple whammy to industry

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Britain's beleaguered manufacturers will endure further pain because of the UK economy's resilience in the face of a global slowdown, a leading forecaster warns.

The ITEM Club, which uses the Treasury's economic model, said the relative weakness of the American and European economies would keep the pound strong.

This would deliver a "triple whammy" in the form of falling demand for exports, an uncompetitive exchange rate and a reduced likelihood of the pound joining the European single currency in the near future.

The ITEM Club said it expected the economy to grow by 2 per cent next year, compared with a 1.6 per cent estimate by the Organisation for Economic Co-operation and Development.

But it said there would be a marked contrast between robust growth in consumer and government spending and a bleak output for manufacturing. Industrial output would contact 1.5 per cent in 2002 after a slump of 1.6 per cent this year.

Professor Peter Spencer, its economic adviser, said companies would be unable to raise prices as demand slumped and would instead cut costs to stay afloat. ITEM forecast a 2.2 per cent fall in capital spending by companies while unemployment would hit a peak of 1.3 million in 2003. "The weakness of the US and European economies over the next 12 months is a double blow for industry," he said. "It makes the UK look good and will keep the pound overvalued."

Professor Spencer said although a 1.5 per cent contraction was bad news for manufacturers, it was better than the 3.8 per cent slump forecast for the whole 30-nation OECD area. "When the world economy improves and the pound falls back to a more helpful valuation they will reap the rewards of their creativity," he said.

The Institute of Directors confirmed the picture, saying business confidence has collapsed to its lowest level for three years. The number of firms optimistic about their prospects outnumbered the pessimists by 23 per cent, the lowest figure since mid-1998.

Orders were weak, with export sales especially poor, which the IoD said "augured badly" for manufacturing in the near term.

Meanwhile, the Engineering Employers' Federation, in a joint submission with groups representing some two million workers, urged the Chancellor to shelve further tax rises in favour of aid to ease industry's plight. It called for larger R&D tax credits, investment in scientific training, reform of climate change levy and 100 per cent capital investment allowances.