Fresh signs of slowdown add to rate cut pressure

PROSPECTS OF lower interest rates in both Europe and the UK increased yesterday following fresh signs of a slowdown in the German and British economies.

On the heels of the launch of the euro, a new survey brought indications of a slowdown in Germany, the powerhouse of the European economy. The European Central Bank is expected to cut interest rates again, following the co-ordinated reduction to 3 per cent in member countries last month.

Fresh evidence that the UK is close to recession also boosted hopes that the Bank of England will reduce the cost of borrowing from the current 6.25 per cent, either on Thursday or after next month's meeting of its Monetary Policy Committee.

The purchasing managers survey suggested that manufacturing industry contracted in December for the ninth consecutive month. The gloom was barely lifted by figures showing a record increase in credit card borrowing in November.

Thanks to these dim economic prospects and to its exclusion from euro- phoria, London was the only European market to fall on the first day of trading for the new currency. The FTSE100 index ended just over 3 points lower at 5,879.4, having fallen as much as 71 points earlier in the day.

Yet other European stockmarkets surged, while the euro strengthened against the pound and the dollar, as investors bought euro assets following the single currency's launch. Shares in Paris jumped nearly 5 per cent, and in Frankfurt 6 per cent. Shares in the biggest companies such as France Telecom, Deutsche Telekom and DaimlerChrysler made the biggest gains as institutional investors started to increase their holdings in the euro zone.

The pound closed at 71.09p to the euro, slightly weaker than the 70.2 pence at which it opened. The foreign exchange markets were relatively quiet as dealers tentatively tried out the results of the conversion.

Business surveys in both the UK and Germany yesterday pointed to economic slowdown. In Britain the Chartered Institute of Purchasing and Supply (CIPS) reported the second biggest fall in output in the survey's seven- year history.

One ray of light came in a slower fall in new orders than the previous month, hinting that the recession in manufacturing might be stabilising. But, Peter Thomson, CIPS director general, said it was not a happy start to the year. "We have had some relief in lower interest rates, but another cut is essential."

Separate figures yesterday showed a record rise of pounds 559m in credit card borrowing, with total new consumer credit at pounds 1.3bn. The robust rise suggested consumer spending is still growing at a healthy pace.

Even so, Michael Saunders, UK economist at Salomon Smith Barney, predicted: "Rates will fall to 5 per cent within the next few months." Analysts are divided over whether the next move will come this week, following the half point reduction to 6.25 per cent on 10 December.

Analysts also think a further fall in euro interest rates is on the cards if Germany shows more signs of stumbling. Yesterday's survey showed a sharp drop in manufacturing activity, with output, orders and employment all down in December. Unemployment figures for Germany later this week could show the total climbing back above four million. If so, there will be additional pressure on Europe's central bankers to boost the economy to raise support for the euro. The ECB council is next due to meet on 21 January, but it is unlikely to cut rates again so soon.

Outlook, page 13

Rough ride for pound, page 15