The strength of sterling will cost 117,000 manufacturing jobs over the next three years and halve the level of export growth this year, according to the Foundation for Manufacturing and Industry.
Its forecasts assume a fall in the value of sterling from its current level of DM2.82 to around DM2.52 in the year after next. However, the authors of the report, Dr Andrew Sentance and Paul Robson of London Business School, say that if the pound remains at current levels and goes back above DM3 this year, up to 200,000 jobs could be lost as growth in manufacturing falls to just 1 per cent next year.
The report takes a gloomy view of the likely impact of the climb in sterling on profits and jobs. It says: "The recent appreciation of the pound has unwound the boost to competitiveness that British manufacturing industry received when sterling left the ERM."
Sterling has appreciated by nearly 30 per cent against the German mark since late 1995.
A much brighter picture is painted by the employment agency, Manpower, whose latest quarterly survey says employment prospects are the best for a decade. The survey says the most buoyant area of the economy is the service sector where a balance of 32 per cent of companies expect to take on more staff.
Overall the balance of employers expecting to increase employment is 23 per cent, up from 20 per cent in the third quarter.