Industrial slump rocks Chancellor’s forecasts

The Chancellor took to the airwaves to defend his prediction that the recession will end before the end of the year and the economy will bounce back strongly in 2010 and 2011.

But the City was less than impressed and accused the Government of delivering unrealistic forecasts which could threaten the recovery when it does eventually arrive.

The doubts were fuelled when the CBI said demand for goods manufactured in the UK was falling at the fastest rate for nearly 30 years.

The survey found 60% of firms reported a fall in business in the first three months of the year while just 13% reported an increase. The balance of minus 47% was the worst reading since 1980.

However, manufacturers said they expected the rate of decline to moderate in the next three months.

Ian McCafferty, chief economic adviser to the CBI, said: "The first quarter of 2009 was extremely tough for UK manufacturers but this survey shows firms hope that the worst may be behind them."

Vicky Redwood, UK economist at Capital Economics, said: "While manufacturers have become somewhat more upbeat, the outlook still looks pretty grim. There is growing evidence that the worst of the falls in output are behind us but still nothing to suggest that the economy will actually be growing anytime soon."

In yesterday's Budget, Darling predicted a contraction in gross domestic produce of 3.5% this year followed by growth of 1.25% next year and 3.5% in 2011.

Today he said: "There's a lot of uncertainty around at the present time, but I believe that action we have taken now will have an effect.

"Next year I think the economy will start to grow and I think it will grow thereafter, but that is only going to be the case if we continue to take the action necessary to make sure that we help people, we help families, we help businesses get through this."

But the International Monetary Fund said the UK economy would shrink by 4.1% this year and 0.4% next year.

George Buckley, chief UK economist at Deutsche Bank, said the forecasts delivered by the Chancellor for recovery were too optimistic. "I think the recovery will be much weaker," he said.

He also warned that government borrowing could be far higher than forecast if the economy does not recover on the Chancellor's timetable.
Darling outlined borrowing of a record £175 billion this year followed by £173 billion and £140 billion in the next two years. The spiralling rate of borrowing will push Government debt above £1 trillion for the first time.