WITH UK Manufacturing in Free Fall and World Markets in Turmoil, the Bank of England Surprised Nobody Last Week When It Cut Forecasts for Inflation and Economic Growth at the Launch of Its Quarterly Inflation Report
WITH UK manufacturing in free fall and world markets in turmoil, the Bank of England surprised nobody last week when it cut forecasts for inflation and economic growth at the launch of its quarterly Inflation Report.
The Banks central forecast for growth seems to be well under 2% this year and probably closer to 1.7%, though the report does not give a precise number and contains a range of other, less likely, projections. The central forecast for next year has also been cut by 0.5% to roughly 2.5%, believed to be the trend rate of growth.
This confirms what The Business has argued since the Budget in April: that the British economy is unlikely to meet chancellor Gordon Browns target of 2%-2.5% growth this year and 3%-3.5% next. Given the governments ambitious spending plans, lower growth is likely to have dire implications for the public finances.
The report expects inflation to accelerate from its current record low of 1.5% to 2% by the end of the year, drifting up towards the 2.5% target over the next two years. The Bank still believes there is a significant risk of overshooting after that. It also fears that the planned 1% hike in national insurance contributions next April could lead to increased pay demands as workers try to maintain living standards.
Overall, the Bank gives the impression that it will keep interest rates on hold for now but is prepared for further cuts if the international economy deteriorates further.
But inflation is the least of Browns problems. Manufacturing output in June collapsed by an unexpectedly severe 5.3% on the month, on a seasonally-adjusted basis, according to official figures.
Output declined in most sectors, with the basic metals and paper, printing and publishing sectors particularly hard hit. Car production crashed by 28.7% month on month. If the figures are confirmed, they will represent the steepest monthly decline in manufacturing output since the winter of discontent in January 1979.
Part of the fall can undoubtedly be accounted for by the Jubilee holidays, the World Cup and a quirk of the calendar which disrupted working patterns. Normally, there are two public holidays in May and none in June; this year there was one day off in May and two in June. There were also the maximum possible five Saturdays and Sundays in the month. Many people skipped work to watch the football. Factories may also have closed for longer than anticipated, some, perhaps, for the whole of the Jubilee week.
Part of the decline may be reversed in July as firms catch up on their production plans. But a significant part of it will have been caused by the weakening British economy. This is confirmed by the fact that output rose in a few sectors, including food, drink, tobacco and electrical and optical equipment. …