At last, something to look forward to. Even though latest forecasts show UK manufacturers expect no output growth for the next quarter, with export orders at their lowest for 15 years, the Confederation of British Industry believes the economy is heading for a ‘soft landing’ over the next 18 months.
Exports, the experts say, will next year set out on the road to recovery. Sterling is tipped by the CBI to drift down to DM2.78 by the end of this year and DM2.64 by the end of 1999.
The CBI’s economists do not expect the £3.60 an hour minimum wage to be anything like the touch paper to set off wages growth, that it has been portrayed.
Kate Barker, CBI chief economist, was last week comfortable enough about the future to claim that a wages warning by Bank of England chief economist Mervyn King was ‘overstating the inflation risk’.
King told a Building Societies Association conference that inflation, now around 4%, would continue to rise above the government target of 2.5% by mid-1999 unless wage pressures and domestic consumption were controlled.
He is about to become a deputy governor at the bank and is a member of the monetary policy committee which sets interest rates.
The Treasury and Chancellor Gordon Brown are also reportedly concerned about the effect of the minimum wage on inflation.
The argument from business, including the Engineering Employers’ Federation, has been that a minimum wage risks triggering a chain reaction of increases along the wages chain.
Barker’s view now is that £3.60 is ‘at the top of the acceptable range for business’ and unlikely to cause ‘any major job losses or upward pressure on inflation’.
The EEF agrees with this assessment, although a spokesman maintained there was a danger that periodic increases in the minimum wage would be seen as the going rate for all wage increases.
Barker warns against rash predictions about the impact of the minimum wage, saying only that it could be expected to create ‘around half a percent earnings growth over time’.
Sudhir Junankar, CBI associate director of economics, says it is certainly better for the minimum wage to be introduced ‘when the economy is slowing down, rather than speeding up’.
However, Junankar qualifies the CBI’s optimism about wages and inflation.
‘Our forecast for a soft landing and underlying inflation hitting the 2.5% target will depend on labour market pressures subsiding,’ Junankar says.
‘If earnings growth does not fall back over the rest of this year, as we expect, the economy could yet experience an unpleasant combination of lower growth and higher inflation.’
The EEF’s wages data for the three months to the end of April showed an average increase of 3.7%, up from 3.5% for the three months to the end of March.
David Yeandle, EEF head of employment affairs, blames skills shortages, falling unemployment and rising inflation for the rise.
But despite gloomy economic predictions, the CBI predicts the manufacturing sector is bottoming out.
Last month the CBI surveyed 1,063 manufacturing firms with around 2m employees. It found 32% had below normal orders and 15% above normal, a ‘negative balance’ of 17%, the lowest since May 1996.
Output expectations are the weakest since December 1992. The export orders of 60% of manufacturers were below normal in April, the poorest CBI manufacturing survey result since January 1983. Overall demand in manufacturing was the worst for two years.
But Barker says although UK economic growth will slow for the remainder of this year, it should pick up by the second half of next year.
The CBI May economic forecast predicts GDP growth to end the year at 2.1% and rise to 2.4% by the end of 1999. Export volume growth is tipped to dip to 1.4% for this year, down from 3% forecast in February.
But the CBI believes export volumes will grow by 3.3% at the end of 1999, due to an improved exchange rate and an upswing in the world economic cycle.
‘The key immediate risk is that exports could weaken still further, especially if sterling does not fall in line with our forecasts,’ Barker cautions.
‘We believe interest rates should stay on hold for now, and the next move in interest rates will be down towards the end of this year.’
The CBI expects short-term rates to stay at 7.25% until the final quarter of this year and then fall 0.25%, with base rates declining throughout 1999 to end the year at 6.25%.
So while the news looks grim now, next year is expected to be more promising. The CBI expects Germany will raise interest rates later this year, helping the Deutschmark take pressure off sterling.
Provided sterling eases and labour market pressures subside, UK interest rates are predicted to fall and exports to improve.
And for manufacturers taking advance orders, it is the 12-month outlook which bears the most significance.