Strong recovery forces CBI to raise forecasts

THE LEADING employers' organisation admitted yesterday that a "surprisingly strong recovery" over the past few months had forced it to revise its forecasts for the economy sharply upwards.

The Confederation of British Industry said GDP would grow by 1.2 per cent this year, in line with government forecasts and 50 per cent up on the 0.8 per cent estimate made in May.

It said the driving force behind the acceleration was household consumption, which would rise 2.9 per cent this year, a sharp upward revision from 1.7 per cent in May. Rising house prices and consumer confidence also contributed.

The bullish forecasts came as the CBI's latest survey of manufacturers found they were at their most optimistic for almost two years.

Sudhir Junankar, the CBI's associate director of economic analysis, said the CBI had underestimated the extent of the recovery. "The Treasury got it basically right in November, although we were not absolutely wrong because we did not forecast recession," he said.

Unemployment is forecast to stay stable at 6 per cent until the end of 2000, rather than rising as previously forecast. Interest rates are projected to stay at 5 per cent until 2000 - up from 4.75 per cent in May - while inflation is forecast to fall to 2.1 per cent before rising to 2.3 per cent in 2000.

But the CBI warned that its forecast was based on sterling weakening to 72 pence to the euro from 68 pence - a devaluation of 6 per cent - warning that if it stayed at its current levels it would knock almost half a percentage point off its GDP forecasts. It stressed there was no sign of a "runaway boom" that would require a rate rise.

Kate Barker, the CBI's chief economic adviser, said: "The economy has just shifted out of first gear and now is not the time to start applying the brakes. Indeed, there could be scope for a small cut, especially if sterling gets stronger."

The CBI's industrial trends survey found that the number of manufacturers expecting output to rise over the next four months outnumbered the pessimists by 13 per cent, up from minus 4 per cent in June and the highest margin since September 1997. Mr Junankar described the turnaround as "surprisingly strong".