CBI survey shows collapse in business confidence

BUSINESS confidence has collapsed in the aftermath of sterling's expulsion from the European exchange rate mechanism, Britain's most authoritative survey of manufacturing industry will show this week.

Manufacturing bosses have told the Confederation of British Industry that they are much more gloomy about the business situation than they were three months ago. The CBI's quarterly industrial trends survey will show on Tuesday that optimism has plunged to near the levels of last summer.

The sharp fall in the pound has cheered exporters, who report improved order books now that their products are cheaper in terms of foreign currency, although export orders remain well below normal levels.

Nevertheless, the prospect of higher exports has gone some way to alleviate pessimism about future production levels.

Fewer manufacturers told the CBI that they intended to rein back production in the next four months than did so when asked in the last monthly survey in September. Then, before Black Wednesday, a net balance of 14 per cent of manufacturers said they expected to cut output in the following four months.

A particularly alarming finding is that manufacturers still have many more unsold goods on their storeroom shelves than they want.

Stock levels leapt sharply in July, and this month's survey will show that they remain high. This is normally a good indicator that factory output might drop sharply in the next few months, as more demand is satisfied from stocks than new production.

David Walton, economist at Goldman Sachs, said the survey was likely to 'underline the fact that the economy is probably declining again'.

He said it would not be surprising on the basis of last week's survey from the British Chambers of Commerce if a net balance of 30 to 40 per cent of manufacturers said they were gloomy about the business situation, compared with 9 per cent in the previous quarter. However, this appears slightly pessimistic.

Amid the economic gloom last week, City analysts took some cheer from the retail sales figures for September, which showed an unexpected 0.2 per cent rise in high-street spending during the month. Norman Lamont, the Chancellor, said there was now a 'clear upward trend'.

The British Retail Consortium said the sales growth appeared almost entirely in the first two and a half weeks of the month, and that 'in many areas sales slumped from Black Wednesday onwards'. But James May, director-general of the BRC, said sales appeared to be 'holding up' so far in October.