Further interest rate rise may push industry into recession, warns CBI

Industry is on the brink of slipping back into recession and investment is falling sharply, the Confederation of British Industry warned yesterday when it published its latest survey of manufacturing.

Nick Reilly, chairman of Vauxhall Motors and head of the CBI's economics committee, urged the Bank of England not to raise interest rates again next week, as that could send the strong pound higher still. "Failure to keep rates on hold could send manufacturing into decline," he said.

The CBI also called for the Government to take steps to reverse some of the increase in the burden of business taxation since 1997. Kate Barker, the CBI's chief economist, said the organisation wanted the Chancellor to withdraw planned changes to corporate taxation announced in the Budget and now going through Parliament in the Finance Bill.

The pound's index against other currencies climbed higher still yesterday as the euro fell to new lows. The strong pound claimed its latest victim with the closure of the Dunlop boot factory at Walton, near Liverpool, after 150 years. The sterling index ended at 111.9, up from 111.4, having climbed higher during the day. The pound advanced to 58.30p to the euro. The European currency fell against the dollar to a low of 91.60 cents.

The euro was not boosted by comments from Gerhard Schröder, the German Chancellor. He said it was a mistake to think that European politicians welcomed the weak currency for its boost to exports.

DeAnne Julius, the leading "dove" on the Monetary Policy Committee, yesterday expressed concern about the strong pound. "Manufacturers just can't compete at this sort of rate," she said, adding that inflation had been below target in the past because exchange rate forecasts had been "badly wrong". However, she also warned about rapid pay growth.

The CBI survey showed business confidence falling for the first time in a year. Mr Reilly said an even more worrying result was the fall in businesses' investment plans for next year. Investment intentions were well below their long-run average, and had been deteriorating since mid-1998. "This will lead to a shrinking industrial base and a reduction in the long-run supply capacity of British manufacturing," he warned.

The survey pointed also to a continuing decline in employment in manufacturing. Job cuts totalling 18,000 in the first quarter of this year were likely to be followed by another 13,000 in the second quarter.

The survey showed 20 per cent of companies reporting increased optimism and 22 per cent reporting a decrease, with the balance of minus 2 per cent comparing to plus 9 per cent last quarter. "There has been a very noticeable shift in mood," said Ms Barker. Not surprisingly, the motor and metals industries reported huge drops in confidence. Others, notably electrical engineering, remain very upbeat about prospects.

Geoffrey Dicks, an economist at Greenwich NatWest, said: "Industry is being crushed under the weight of the strong pound."

However, many City economists believe interest rates will climb higher because of the strength of the service sector. The latest inflation figures showed that services inflation has climbed above 5 per cent, while goods prices were 2.3 per cent lower than a year earlier.

"Weak though this survey is, it is not so weak as to suggest that manufacturing's woes are going to drag down the rest of the economy," said Leo Doyle at Dresdner Kleinwort Benson.