'Doom and gloom' talk of credit crunch could tip us into recession, warns Brown aide

One of Gordon Brown's most trusted economic confidantes is to warn of the dangers of "doom and gloom" tipping the economy into recession.

Business minister Shriti Vadera will tell an audience of senior industrialists tonight that the British economy is in a strong position to ride out the global slowdown triggered by the credit crunch and the soaring oil price.

Baroness Vadera spoke out as leading economists said the next move in the Bank of England base rate must be down  -  despite growing alarm about inflation.

Of eight City economists asked if interest rates should be raised or cut from the current five per cent level, five said the base rate ought to be lowered, two said it should go up and one said it should be left at the current level.

Until this week the prospect of interest rates rising was seen as virtually off the scale of unlikely events as the economy drifted ever closer to recession.

Many economists said they would be at four per cent or lower by the year end.

But intense speculation on a rise in interest rates has prompted the markets to bet on them going up, while the European Central Bank moved to damp speculation of its having a flurry ofrises by saying an increase due next month was a "one-off ".

Baroness Vadera's intervention tonight follows her admission that the economy was facing its first "crisis" of the era of globalisation.

But speaking at the CBI South-East annual dinner tonight she will say: "I think it is important not to talk ourselves into thinking that all is doom and gloom.

"We are well placed to weather the storm compared with previous times and to most of our competitors.

"Employment is high, the corporate sector is running a surplus which is in excess of two per cent of GDP, corporate profitability is high and debt is low, and 90 per cent of investment is funded from retained profits.

"The expects the UK to be the G7's fastest growing economy in 2008."

The minister, who spent eight years as senior economic adviser to Gordon Brown when chancellor, is also offering an "I feel your pain" message to an increasingly hostile business community.

She will admit that getting business tax right is "not easy in a globalising world" after CBI director-general Richard Lambert said yesterday that Chancellor Alistair Darling had "lost it" on business taxes such as capital gains tax.

She is also due to tell the audience of business executives: "I know that many of you will be facing an uncomfortable time with a combination of sudden rises in oil and fuel prices creating pressure on margins, weakening consumer confidence and perhaps issues around access to credit.

"I understand certain sectors such as retail, construction and energyintensive companies are particularly under pressure."

Where should interest rates go now? Economists have their say

DOWN:

Howard Archer, Global Insight: "I believe the next move in interest rates should be down, but not for some months to come.

"While the inflation threat is very real, so is the danger that the UK economy could sink into recession.

"There is still no evidence that wages are being pushed up by higher inflation and expectations.

"However, the Bank of England needs to be sure of this before cutting interest rates.

"If wages do start rising appreciably, then the BoE would probably need to raise interest rates.

"However, that could cause carnage in the housing market and lead to an extended, deep downturn."

Vicky Redwood, UK economist, Capital Economics: "The next rate move will be down  -  eventually.

"That is because we believe that the slowdown in the economy is going to be sharp enough to keep the lid on the inflationary pressures that exist.

"That means we are not now looking for a change in interest rates until the fourth quarter."

Philip Shaw, chief economist, Investec: "The simple answer is down. We judge that the downside risks to the economy are more serious than the inflation risks.

"Whilst inflation will rise sharply in the short term we expect it to moderate significantly in ....."

Michael Saunders, chief UK economist, Citigroup: "We doubt the MPC will hike rates.

"The economy is slowing sharply and is likely to weaken further in response to the credit crunch, housing weakness and the erosion of real incomes."

Alan Clarke, UK economist, BNP Paribas: "There is a chance interest rates will rise this year but we think it is more likely they will stay where they are, before being cut again in in 2009.

"We see a cut of half a percentage point in the first half of 2009 because inflation will have peaked by then.

"Inflation will peak at 4.2 per cent by October, but will then start to fall back."

UP:

Martin Weale, director, National Institute of Economic and Social Research: "Despite the fact that the economy is now scarcely growing, we share the view that concerns about inflation make it more likely that interest rates will be raised than reduced in the coming months. It is most likely the BoE will wait until autumn.

"If they raise rates and inflation comes back down more than expected, they can always cut them again."

James Hughes, market analyst, CMC Markets: "The big issue is that the MPC has to control inflation as best it can.

"CPI is already outside of the target range, the BoE is already feeling threatened by the Government on at least two factors (who becomes the new deputy governor and talk of a new regulator  -  the 'resolution authority') and so long as commodity prices remain buoyant then the only hope of constraining inflationary pressures would seem to be further rate hikes."

NO CHANGE

Howard Wheeldon, BGC Partners: "Rates should be left at five per cent.

"Consumer inflation may be rising to four per cent and even beyond that but raising rates now to reduce domestic demand risks creating a dangerous stagflation environment.

"GDP growth has already fallen significantly and is likely to further fall. The risks to the economy of raising rates become far more significant and would undoubtedly lead to a massive round of job cuts.

"Fear of rising rates is not what the economy needs."