CBI raises growth forecast to 3.1%

The economy may have reached a higher sustainable level of growth, Britain's largest employers' organisation said yesterday, as it raised its growth forecasts but cut its outlook for interest rates.

The economy may have reached a higher sustainable level of growth, Britain's largest employers' organisation said yesterday, as it raised its growth forecasts but cut its outlook for interest rates.

The Confederation of British Industry pencilled in 3.1 per cent growth this year and 2.7 per cent in 2001 - both 0.1 points up on its May forecast.

The CBI cut its assumption for interest rates, which it said would stay on hold at 6 per cent until the end of the year. In May it assumed a level of 6.25 per cent. Its inflation forecast was unchanged at 2.3 and 2.4 per cent this year and next respectively, below the Government's target 2.5 per cent.

Kate Barker, the CBI's chief economist, said: "Inasmuch as the forecast shows that for the next couple of years the economy can continue to grow above the long-term trend without triggering inflation, there's a possibility the trend rate has risen."

Hopes that the UK is finally benefiting from a United States-style New Economy paradigm - higher growth and lower unemployment without higher inflation - were boosted by comments by DeAnne Julius, one of the Monetary Policy Committee's doves.

In a speech to Scottish businesses, Ms Julius said there was a "convincing case" that the step change in productivity seen in the US on the back of technological innovation was a leading indicator for developments here. "The UK, like the US, has seen a sharp increase in investment spending on information and communications technologies, and productivity growth has recently begun to rise," she said.

But not all City economists are convinced. Stewart Robertson of Lombard Street Research said: "Interest rates will still have to go higher in this cycle."

The key factor in the CBI forecast was a revision of almost 1 percentage point in manufacturing output growth, to 1.4 per cent this year compared with 0.5 per cent in May. This was on the back of an upgrade to its export growth forecast from 5.1 to 5.9 per cent.

"It is a benign overall picture," said Ms Barker. "But I would not want to say any more than benign. Our key concern is that high sterling is squeezing manufacturers' profit margins and discouraging investment."