CBI falls in behind the chancellor's forecast for robust growth

Britain will enjoy robust growth this year - provided the Bank of England refrains from raising interest rates over the next few months, the Confederation of British Industry said yesterday.

The employers' organisation is expecting the economy to grow by 1.8% in 1999 and by 2.9% in 2000 - which would be in line with treasury forecasts the CBI previously thought were too optimistic.

"2000 promises to be a year of better balanced, robust growth supported by both domestic and export demand," said Sudhir Junankar, the CBI's associate director of economic analysis.

"Our concern is that if interest rates go up too far it could hit manufacturers' competitiveness," he said.

Unexpectedly high growth is the result of the resilience of household spending, despite bad news about the economy during the first few months of the year. Consumer spending has helped bolster the economy, but demand is outstripping domestic supply, which is causing a widening of Britain's trading gap with the rest of the world.

"Consumer spending has now been growing at an average of 3.8% a year since 1996, while overall growth has averaged just 2.5%," said Kate Barker, the CBI's chief economic adviser.

"The continuing imbalance between domestic spending and foreign trade has pushed the current account into the red. The task for policymakers is to slow the pace of the consumer expansion, but not to overreact by putting interest rates up too much and adding to pressure on exporters."

In particular the CBI warned that if the chancellor, Gordon Brown, were to relax the tax and spending reins, the Bank might put up rates to compensate. "With inflation pressure limited, a cautious approach to interest rates now should achieve the right result, but will need to be supported by the chancellor resisting calls to spend more or tax less, just as firmly in the spring as he has in November," said Ms Barker.

The CBI expects the Bank to raise rates to 5.75% in the spring of 2000 before edging them down again to 5.5%.

The manufacturing recovery remains on track, according to the CBI's latest snapshot of the sector. Although total order books remain below normal, they have improved to their best level since March 1998.

"The outlook for the manufacturing sector remains healthy," said Richard Iley, UK economist with ABN Amro. "The outlook is for gross domestic production to continue to hum along at an annualised rate of 3.5% to 4% right through next year."

The housing market is also humming along, according to separate figures from the British Bankers Association. Mortgage approvals totalled 128,331 in October, worth a total of £6.5bn - around 2.5% higher than the September figure. But the value of the average loan dropped to £69,800 in October from £71,000 the previous month.

The BBA said mortgage lending appeared to be on a plateau, and could stay at this level for the rest of the year.