Outlook more gloomy, says CBI

Business leaders yesterday cast fresh doubt on Chancellor Kenneth Clarke's ambitious 3 per cent growth forecast for this year, predicting that it would be missed by a substantial margin.

In its latest quarterly forecast, the CBI paints a gloomy picture of the outlook this year even if the Chancellor makes further reductions in interest rates. It said the continuing slowdown will allow Mr Clarke to cut rates by half a per cent and still hit his inflation target.

The CBI reported continuing gloom on the part of industrialists about the state of their order books. However, there was an improvement in output expectations for the next four months. Manufacturers replying in February to the monthly trends survey said that stocks remained too high. They now expected lower price increases in the next four months than they had in January.

The loss of momentum following last year's collapse in manufacturing and construction growth has led the CBI to cut its forecast for growth in 1996 from the 2.5 per cent it predicted last November to 2.1 per cent. Investment and exports are now expected to contribute much less to growth and the CBI has lifted its estimate of the drag on the economy from an inventory correction.

Kate Barker, the CBI's chief economic adviser and a new member of the Treasury's Panel of Independent Forecasters said: "If, as we expect, UK growth remains weak in early 1996, interest rates could be reduced by half a point without imperilling the Government's inflation target."

The CBI forecast now falls a long way short of the Chancellor's budget forecast of 3 per cent - even though the Chancellor said at the time that it did not depend on lower interest rates. A particularly sharp discrepancy between the two forecasts concerns their outlook for exports. Whereas the Treasury predicts an expansion in exports of goods and services of over 7 per cent, the CBI is forecasting little more than 2 per cent.

A brighter note came from the latest official estimate of GDP growth in the fourth quarter of last year. This was revised up from 0.4 to 0.5 per cent, partly because of a revival in construction and partly because of higher output from service industries. Lower stockbuilding dragged output down by 0.5 per cent. This was counter-balanced by a rise in consumer spending.