Optimistic CBI forecasts turn in manufacturers' fortunes

BUSINESS CONFIDENCE has returned to manufacturing industry for the first time in almost two years, according to a survey published yesterday.

Optimism rose slightly in the latest quarter, its first improvement since October 1997, the Confederation of British Industry said. It said a turnaround in manufacturers' fortunes was in sight, while one City economist raised his forecast for a rise in interest rates next week to one in five. But optimism about export prospects over the year ahead deteriorated a little further in the face of the strong pound. The CBI said that unless sterling fell back on the foreign exchanges, the Bank of England should cut rates by another 0.25 per cent later this year.

Nick Reilly, chairman of the CBI's economic affairs committee and head of Vauxhall Motors, said he believed rates were at the right level, given signs of a domestic recovery. But he added: "If inflation pressures prove as weak as our present forecast, the next move in rates should again be down later this year."

The survey showed 21 per cent of firms were more optimistic about business than four months ago while 16 per cent are less optimistic, giving a positive balance of 5 per cent. This compared with balances of minus 6 per cent in April and minus 40 per cent in January.

But all other indicators, including output and orders, fell - although at a slower rate than the last survey in April. Mr Reilly said: "Things are less gloomy ... but these trends need to be confirmed if we are to look positively at the long-term future."

Economist Adam Cole of HSBC said the sharp rise in optimism pointed to above-trend GDP growth. "The rise in overall business ... is further evidence that rates do not need to fall further," he said.

Kevin Gardiner of Morgan Stanley, in a note written before yesterday's survey, said the probability of a rate rise at the August meeting was between 15 and 20 per cent. "For a money market that has not seriously considered the possibility, this would be traumatic," he said.

It would be the first tightening of monetary policy since June 1988.