Outlook: Things not as gloomy as CBI says

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THE CONFEDERATION of British Industry has released its gloomiest survey for almost 20 years. How seriously should it be treated? There have only been three times in the survey's history when the fall in manufacturing confidence was of a greater magnitude than in the first half of early October - the most recent in July 1980. Yet the UK stock market responded by surging almost 2 per cent.

Equity markets tend to be driven by expectations about corporate profits. So if British business - as suggested by yesterday's survey - is gloomy about future earnings, why didn't the market fall?

The first part of the answer relates to the make-up of the CBI confidence indicator, historically a good forward indicator of economic growth. The CBI survey only covers manufacturing, which accounts for an ever-shrinking proportion of the UK economy. So although manufacturers may be gloomy, many of their counterparts in services are still upbeat.

At one time, confidence in the manufacturing sector was a guide to the underlying health of the economy. Shrinkage of the manufacturing sector means that the CBI confidence indicator - though still relevant - is of less importance.

The timing of the last CBI survey raises additional questions. The bulk of survey responses were received in the last few days of September and the first few days of October - a period when many feared we were on the verge of a financial calamity of Thirties proportions.

Since then, following the cut in UK interest rates and, particularly, the surprise move by the US Fed, a semblance of calm has returned to financial markets. Arguably then, the fall in the CBI confidence indicator simply reflects the panic seen in the markets at the beginning of the month, rather than anything more substantive. Its only value would then be that it makes a cut in interest rates a little bit more likely - hence yesterday's rise in the stock market.

In all likelihood, the economic outlook is not as gloomy as a cursory reading of the CBI survey indicates. Obviously there is a serious recession going on in manufacturing, but it is not at all clear this will spread to the rest of the economy. Most forecasters continue to suggest it will not.

On the other hand, the stock market recovery of the past four weeks may also be overdone. Most of the bargains of six weeks ago have now gone. Just as the CBI survey probably paints an unduly gloomy picture, many share prices seem to be returning to a level scarcely likely to be justified by earnings over the next few years