BANK of England policymakers were today urged to resist "misguided calls" to raise interest rates as business leaders warned the UK economy could be just months away from recession.
The British Chambers of Commerce (BCC) described the results of its latest economic survey as "alarming" and said confidence levels had fallen sharply in both manufacturing and services. Nearly 5,000 businesses of all sizes and from all sectors repli
ed to the survey – a record response.
BCC director-general David Frost warned that, if the downward trend continued, UK business was only one quarter away from technical recession – two consecutive quarters of negative growth.
He said the Treasury may be tempted to raise business taxes in the next Pre-Budget Report as the pressure on government coffers grows.
"This would be a catastrophe," Frost argued. "I am sending Alistair Darling and Gordon Brown a strong message from the businesses I meet every day up and down the country: to put more pressure on business would not only restrict growth and hit the consumer hard, it would further crush what our economy is based on – confidence."
Members of the Bank of England's nine-strong monetary policy committee (MPC) will decide on the next move on interest rates this Thursday.
With inflation running well above target, and set to rise further, the MPC has little leeway to trim borrowing costs in order to boost a flagging economy.
However, some economists believe there remains an outside chance of a rate cut this month.
Official data showing a bigger-than-expected decline in manufacturing output will have strengthened that case.
The Office for National Statistics yesterday said the sector's output had fallen 0.5 per cent between April and May. Analysts had been expecting a 0.1 per cent decline.
The wider measure of industrial production, which includes oil and utilities output, showed a monthly fall of 0.8 per cent.
Manufacturers have been hit in recent months by spiralling input costs such as oil – a raw ingredient for a host of products – as well as higher metals and food prices.
A weaker pound is providing some respite for UK manufacturers, with the BCC report and recent Scottish Government figures pointing to steady export sales.
However, economists warn that trend is likely to be countered by significantly slowing growth in the eurozone and a stagnant US economy.
Howard Archer, chief UK economist at forecasting body Global Insight, said: "Sharply contracting industrial production heightens concern that the economic downturn is deepening.
"We suspect that GDP growth will have been limited to 0.2 per cent quarter-on-quarter in the second quarter. Furthermore, the third quarter could be weaker still."
Today's BCC survey showed key service-sector measures for domestic sales and orders, employment expectations and confidence at their lowest levels since the recession of the early 1990s.
David Kern, economic adviser to the BCC, said: "A major recession can still be avoided, but forceful measures are needed to improve confidence. The MPC must resist misguided calls for higher interest rates.
"Indeed, if wage pressures remain muted, the option of early interest rate cuts must be considered."
MANUFACTURING: HIGHS AND LOWS
The full article contains 536 words and appears in The Scotsman newspaper.
