Rates must fall, insists CBI despite upturn at factories
Wednesday, 27 July 2005
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The CBI has hammered home its call for a cut in interest rates next week despite publishing figures yesterday showing a modest improvement among UK manufacturers.
The country's largest employers' body said orders fell in the second quarter, but at a slower pace than in the first three months.
Factories also enjoyed an unexpected rise in export orders - the first in 15 months - following the pound's fall against the dollar. But this was not enough to prevent the fourth consecutive quarterly fall in total orders.
The CBI said companies were forced to cut the prices they charged their domestic customers, adding to the squeeze on their profit margins. This is "clearly affecting business confidence", said Ian McCafferty, its chief economic adviser. "These results reinforce the case for a rate cut on 4 August. It is not just manufacturing but also what is going on elsewhere in the economy.
"It is clear that retail and manufacturing are finding conditions extremely difficult and we now know the slowdown in the general economy has been faster."
But Mr McCafferty said it was a "modest" slowdown rather than a recession, adding that the Bank of England could afford to wait and see the impact from a quarter-point cut before deciding whether to act again. Economists expect the Bank to cut rates by a quarter point to 4.5 per cent next week, following official figures showing the economy grew at its slowest rate in more than 12 years in the second quarter. They also showed manufacturing has slipped into recession.
"Despite some signs that activity may have started to decline at a slower pace, manufacturing may still struggle to pull itself out of recession in the third quarter," said Paul Dales, the UK economist at Capital Economics. "This survey will not stop rates from falling next week."
Meanwhile the crisis at MG Rover continued to hit UK car production last month, with the number of cars made dipping 7.2 per cent. The Office for National Statistics said car production reached 144,252 units in June 2005 compared with 155,451 in June last year.
Christopher Macgowan, chief executive of the Society of Motor Manufacturers and Traders said: "The suspension of production at MG Rover significantly contributed to the [recent] dip in UK production."
