Industry woes deepen as ECB slashes growth forecast

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The European Central Bank yesterday cleared the way for a cut in interest rates as it slashed its economic growth forecasts for this year and 2003.

It cut a full percentage point off its prediction for next year, pencilling in growth of between 1.1 and 2.1 per cent compared with July's optimistic forecast of 2.1-3.1 per cent.

"The disappointing picture mainly reflects the persistently high degree of uncertainty," the bank said in its monthly bulletin.

Its comments came as the Confederation of British Industry warned that manufacturing was "sliding back" into recession, although analysts said this would not be enough to prompt the Bank of England to cut rates.

The ECB believes its 12-nation economy grew by 0.8 per cent this year, compared with 1.2 per cent forecast in June. "It is expected that growth will remain subdued in the coming months," it said. The bank also lowered its outlook for inflation, adding that this was a key factor behind its decision to cut interest rates by a half-point last week.

"The evidence has increased that inflationary pressures are easing, owing in particular to the sluggish economic expansion. Furthermore, the downside risks to economic growth have not vanished."

Taking a mid-point in the ECB's range for GDP next year of 1.6 per cent, the bank is now the most pessimistic of any major international forecaster.

Christel Aranda-Hassel, an economist at CSFB investment bank, said: "This leaves the door open to cut rates again if growth continues to disappoint and becomes even more sluggish than the current modest expectations."

The gloom was compounded by a fall in car sales and a collapse in French factory production. Meanwhile, the main German research institutes cut their forecasts for Europe's largest economy next year.

While the UK looks set to outperform the euro area next year, there was little sign of a pick-up for British industry. The CBI's latest survey showed that manufacturers expect demand to contract over the coming months, the first time they have turned pessimistic since the start of the year.

"There will be no Christmas cheer for manufacturers this year as fears mount that the sector will slip back into recession," said Doug Godden, its head of economic analysis.

But economists said that with house prices surging and the Bank worried about inflationary pressures, there was little hope of an imminent rate cut.

Colin Warren, European analyst at GFC Economics, said: "The plight of manufacturers may not stand in the way of tighter policy. Despite weakness, the next move in rates could still be up."