Pressure on rate cut after Bank predicts lower growth of 1.8%

Prospects of another cut in interest rates are likely to be increased this week when the Bank of England publishes a report suggesting that Britain's economic growth may reach only 1.8 per cent this year instead of 2.3 per cent. The Treasury's official forecast is still a relatively buoyant 2.25 per cent.

In the first half of this year, the economy has grown by only 0.4 per cent, so the latest projection will still require a rapid acceleration for the rest of 2003. The first three months were the worst since the 1992 recession and the second three months grew at half the rate predicted by the Bank in its May inflation report. The current hot weather is regarded as a net drag on economic activity. While beer and ice cream sales are up, most retailers have suffered and absenteeism is expected to be higher. The pound has strengthened in the past few weeks, inhibiting exports and favouring imports.

The doves on the Bank of England Monetary Policy Committee will argue at their next meeting in September that interest rates must fall again to produce the necessary stimulus. The Chancellor, Gordon Brown, will be leading those hoping for faster growth, as the slowdown is having a direct and painful effect on his tax-raising programme because of lower spending and earnings. He may be forced to borrow more than he intended, which would put upward pressure on rates. But companies in the services sector have enjoyed a surge in demand since the end of the war in Iraq, according to a report published today.

The survey, which covered a broad range of industries varying from financial services to real estate, showed firms were anticipating the strongest sales growth since the mid 1990s. However, a separate survey showed that UK manufacturers were still in the doldrums.

The upbeat report was published by the Chartered Institute of Marketing, which found businesses were forecasting a 10 per cent sales increase in the coming year -double that of the previous 12 months.

It said the benefit was spread across all sectors, with automotive, financial services and all other non-manufacturing sectors such as mining and agriculture predicting double-digit growth.

The proportion of businesses expecting their sales plans to be over-achieved has increased 10-fold from 3 per cent to 30 per cent in the last three months.

Peter Fisk, the CIM's chief executive, said: "The survey is a clear reflection of the growing positive mood in business following the end of the war and the increased buoyancy in the investment market."

Andy Viner, a partner at the accountants BDO Stoy Hayward, said: "It reflects the rising confidence and optimism that is gradually being felt in the professional practices sector, and across other service industries, nearly four months after the end of the main phase of the Iraq war."

Another report today forecasts a recruitment drive in services such as advertising, PR, accountancy and management consultancy next year. The Centre for Economics and Business Research said employment in business services would grow by 2.3 per cent a year from 2004. This will follow stagnation over the past two years.

"These rates are slower than the 6 to 7 per cent growth in the 1990s but will still make an impressive contribution to the economy," said Douglas McWilliams, its director.

It said the fastest growing sectors would be IT, with 5.3 per cent annual jobs growth, advertising, with 4.1 per cent growth and law, with 3.3 per cent growth.

However, the Confederation of British Industry said there was little sign of a let up for manufacturers with orders for small and mid-sized enterprises (SMEs) falling for the 10th quarter in a row. Demand for their products has now fallen continuously for two and a half years, the CBI said.

Looking ahead there was a little encouragement with firms expecting demand to fall at a slightly slower rate over the next three months than it has over the last year.

Simon Bartley, chair of the CBI's SME council, said: "We must hope that low interest rates around the globe will improve the sector's fortunes. But at the moment the signs are that SMEs in manufacturing are continuing to struggle."