24 Aug 05. An article entitled Growth forecast down as factories suffer
BY ANDREW ELLSON in the Times confirms BATTLESPACE’s ongoing concern with regard to the continual erosion of the UK Industrial Base.
The Government’s predictions for economic growth look increasingly at odds with consensus forecasts after the country’s biggest business lobby group slashed its estimation of GDP growth for the second time this year.
In its quarterly analysis of the state of the economy, the Confederation of British Industry reduced its forecast for GDP growth in 2005 to 1.9 per cent, down from the previous estimates of 2.3 per cent in May and 2.5 per cent at the start of the year.
The downgrade coincides with news that manufacturing orders in August fell at their sharpest pace in nearly two years and follows a similar move yesterday from the British Chambers of Commerce, which cut its growth forecast to 2 per cent.
In April’s Budget statement, Gordon Brown, the Chancellor of the Exchequer, predicted growth of between 3.0 and 3.5 per cent.
Previously it was thought that if growth failed to reach the Chancellor’s 3 per cent estimate, he would have to break his economic “golden rule” of borrowing only to invest in capital projects over the course of an economic cycle, or he would have to raise taxes to meet the shortfall.
But last month the Chancellor announced that the Treasury was re-caclulating the date at which the economic cycle began from 1999 to 1997.
Putting back the start of the cycle by two years allows the Treasury to include the £9 billion surplus in Government spending achieved in this period.
In July, the Office for National Statistics (ONS) reported that GDP grew by 0.4 per cent in the second quarter of 2005 and by 1.7 per cent over the year — the slowest growth rate since the first quarter of 1993. The CBI said it had lowered its growth forecast because consumer spending was falling with households becoming less willing to finance shopping through debt. It also said business investment would remain subdued with profit margins squeezed because of higher oil prices. The CBI forecast growth of 2.3 per cent next year with inflationary pressures easing as the price of oil retreats. It said that continued below trend growth meant a further interest rate cut could not be ruled out.
Ian McCafferty, the CBI’s chief economist, said: “The forecast for a modest recovery next year is based partly on the view that world economic conditions will remain benign, as oil prices ease back a little.
“But with the growth of consumer demand set to remain sluggish by the standards of recent years, the UK economy is clearly vulnerable, should global conditions take a turn for the worse.”
The CBI’s monthly industrial trends survey also released today showed that factory orders fell further during August, with total order books at their lowest level since October 2003. Last month the ONS confirmed that manufacturing was in a technical recession after suffering declining output for two consecutive quarters. After the release of the CBI’s figures sterling fell and government bonds extended gains as traders bet the data increased the probability that the Bank of England would have to cut interest rates again in the coming months.