Top CBI officials are to hold urgent talks with Norman Lamont later this week after the organisation's latest survey disclosed there was no end in sight to the manufacturing recession.
The quarterly survey of industrial trends, one of the most authoritative guides to the economy's performance, shows that manufacturers expect the recession to continue for the next several months, and possibly longer.
Howard Davies, the CBI's new director-general, said: 'The Government does have an opportunity to influence the economy. It is wrong for the Government to argue that it is completely powerless to do anything, which is what it seems to do at the moment.'
Ominously, Conservative MPs are beginning to cast doubt over the future of the Chancellor - and the Prime Minister - if they refuse to bend to demands for action to get interest rates down.
John Carlisle, the right-wing MP for Luton North, said of the Chancellor: 'If this particular doctor cannot cure the patient, then obviously he must go.'
He added in a BBC radio interview: 'I think the Prime Minister has got to take some drastic decisions, because I fear that his position itself may be under some threat if he doesn't do so.'
Senior Tory MPs are complaining that Mr Major has 'boxed himself in' on interest rates and that if the economy is still in the doldrums in the autumn, with no trace of recovery and no hint of policy changes, his leadership of the party could be at stake.
'This hands-off approach is not good enough,' one moderate MP warned yesterday. 'What happened to Margaret Thatcher could happen to him. And he has far fewer friends than she had.'
A backbench loyalist, Sir Patrick McNair-Wilson, said Mr Major risked a grass-roots revolt at the October party conference: 'John Major has to be a pragmatist. He has to be aware that those little pieces of coral sticking up above the water could be a reef - and he would be unwise to go driving straight at them.'
The spark for yesterday's Tory unrest had been Monday's Brussels agreement on minimum VAT rates, which prompted the former party chairman Lord Tebbit to warn that apart from the loss of sovereignty the deal amounted to an anti-competitive price ring.
In an angry and impassioned defence of the deal, Mr Lamont told BBC radio's Today programme that his critics were 'up the creek'. The suggestion that he had signed away sovereignty was 'a complete scare and a very silly, silly season story'.
Defending his Chancellor, Mr Major said: 'We secured a minimum rate of VAT which means we do not have to change our rates of tax at all. Many other countries have to change their rates of tax.'
The CBI, which wants the Government to arrange a concerted cut in European interest rates involving a revaluation of the mark if need be, put its case to Mr Major last week. Yesterday, it warned that not only was there no sign of an end to recession, there was also a risk that contracting investment in plant and machinery could put at risk Britain's ability to compete in international markets.
The CBI's council will debate the economy today before the talks with the Chancellor. The confederation emphasises it is not pushing for a unilateral devaluation of sterling but accepts that in the end the only quick route to lower rates in Europe may be a revaluation of the mark against all other European currencies.
According to the CBI survey, a rising proportion of manufacturers think that the level of new orders will be flat in the next four months and that output will register a further fall as some demand is met from the storeroom shelf rather than the production floor.
Moreover, the survey shows that hopes of a recovery in demand and output registered at the time of its April survey were severely disappointed. Manufacturers' pessimism over past order levels remained unchanged. An increasing proportion reported that output levels had fallen in the last four months. Meanwhile, general business optimism has hit its lowest point since January, though still far above the low point of January 1991.
Despite the gloom, CBI economists said there was no evidence in its survey to support the fears of some leading industrialists and economists that the recession could deepen into slump.
The survey, which covers 1,291 companies accounting for about half of Britain's manufacturing exports and employing 2 million people, shows that 19 per cent of companies surveyed expect output to rise in the next four months. Against this, 22 per cent of firms predict a fall in output, and the resulting negative balance of 3 per cent is the poorest quarterly result since January.
A negative balance of 9 per cent of companies polled said they were less optimistic about their business prospects, and a negative balance of 3 per cent were less optimistic about future exports, also the lowest readings since January.
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