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Economy is not all ‘doom and gloom’ – even for manufacturing

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Economic growth will be sluggish for the rest of 2001 but manufacturing will start coming out of its technical recession by the end of this year and output growth will revive in 2002. That is what the CBI predicted yesterday as it publishes its quarterly economic forecast.

The CBI is now forecasting that GDP will rise by 2 per cent this year as a result of the world-wide slowdown and the effects of foot-and-mouth disease. That compares with the 3.1 per cent averaged in 2000. Growth will bounce back next year to average 2.5 per cent, but that is still 0.2 percentage points below the figure predicted for 2002 in the previous quarterly forecast.

After declining for the first three quarters of 2001, manufacturing output will turn up in the fourth quarter and grow modestly throughout 2002. For 2001 as a whole manufacturing output is expected to fall by 1.1 per cent, a significant downward revision of the 0.1 per cent rise the CBI forecast in May, and rise by only 0.6 per cent in 2002.

Export volumes are expected to slow sharply over the coming months but recover next year as world trade picks up. Comparing the fourth quarter of 2001 with the same quarter last year they are expected to rise by just 1.5 per cent, implying 3.4 per cent for the whole of 2001. But export growth is forecast to recover to 4.4 per cent in 2002.

The outlook for inflation continues to be good. Underlying retail price inflation is forecast to go on undershooting the government’s target. Comparing prices with the same quarter last year, inflation will average 2 per cent at the end of this year and reach a low point of 1.8 per cent in the second quarter of 2002. It is then expected to edge up slightly to average 2.3 per cent by the end of 2002. Average earnings growth is expected to ease over the year. It will average 4.5 per cent by the end of 2001 and remain broadly similar during 2002.

Digby Jones, CBI Director-General, said: “Despite benefiting from stable oil prices and some revival in export markets, manufacturing will continue to be the key weakspot in the UK economy. The likely upturn in the world economy will feed through next year but deliver only modest manufacturing growth. The Climate Change Levy – which is adding to costs and hindering job creation – is not helping recovery. Firms are continuing to do all they can by raising productivity but a further interest rate cut will be needed. We would expect to see interest rates at 4.75 per cent by the end of the year, if not sooner. With inflation set to stay below the government’s own target there is no obstacle to a cut.”

The CBI is forecasting interest rates will be reduced by a quarter point before the end of the year and remain at that level throughout 2002. That projection is unchanged from the May forecast.

Sudhir Junankar, CBI Associate Director of Economics, said: “Next year’s economic recovery will be driven by home demand led by the consumer and supported by higher government spending. But the current imbalances in the economy will persist next year with manufacturing output up only modestly and trade still a significant drag on economic growth.”

The forecast for surpluses in public finances has been revised downwards as a result of the slowdown in economic growth. In the May forecast, public sector net borrowing was expected to be showing a surplus of £3.9 billion in 2001/2002 and £3 billion by 2002/2003. Surpluses of £3.6 billion and £2.5 billion are now expected. Unemployment on an ILO basis is expected to rise slightly over the next few months peaking at 1.52 million in the second quarter of next year but remaining broadly stable over the rest of the forecast period.


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