As the pound slipped closer to its floor in the European exchange rate mechanism (ERM) yesterday, the CBI predicted that an interest rates rise from 10 to 11 per cent to defend the currency would cut economic growth in 1993 by almost a third and further postpone recovery until next summer. At the instigation of Norman Lamont, the Chancellor, EC member governments yesterday formally ruled out a realignment of currencies within the ERM.
As a result of the slow recovery, the CBI expected unemployment to rise to almost 3 million by the end of 1993. The CBI's latest monthly survey of manufacturers showed that nearly twice as many propose to scale down production in the next four months as expect to increase it - the most pessimistic response since May last year.
The gloomier outlook for factory output reflected a deterioration in order books to their weakest level since January, with a majority of almost seven-to-one reporting orders below normal levels. The number reporting stocks of unsold goods to be excessive was the largest for a year. In its latest quarterly economic forecast, the CBI concluded that even if a rate rise could be avoided, the economy would not emerge from recession until next spring, after national output had shrunk by 1 per cent in 1992. In May the CBI forecast that 1992 output would be 0.9 per cent up on last year.
Sudhir Junankar, CBI economist, said the greater pessimism reflected more downbeat responses to the CBI's surveys of manufacturers and retailers, less scope for European interest rate reductions and disappointing gross domestic product figures for the second quarter.
The CBI expected the economy to be roughly flat for the rest of the year, with 'not really a recovery worth the name' in the first half of next year. High street spending would remain depressed with no fall in savings as a proportion of people's incomes.
'It is misleading for the Government to create the impression there is nothing they can do', said Mr Junankar. He added it could increase capital spending, encourage private sector investment or boost the housing market - a prescription suggested by Gordon Brown, the shadow Chancellor.
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