Outlook: A very strange sort of recession

THE 20 PER CENT of the British economy that is represented by manufacturing is sounding more desperate by the hour. Everything seems to be conspiring against it. The turbulence on the world's financial markets is driving sterling ever higher. The way things are going, the pound will soon be back above three Deutschmarks.

On the currency markets, where there are doubts about the dollar, yen and mark, the pound has become everyone's favourite. If you can get 7.5 per cent interest as well - about the highest available in any stable Western economy - it's a one-way bet. Even before this latest bout of global anxiety, manufacturers were squealing loudly. Now the latest CBI survey shows that their expectations for output have collapsed to their weakest level since 1992. Orders are at a five-year low and export orders at a 15-year low.

With survey results like this and the CBI's economists warning that the economy is grinding to halt, one would expect the new forecasts from Centre Point to show at the very least a hard landing. But that's not the case. Oddly enough, the CBI is not forecasting much of a recession at all.

Admittedly, it is more gloomy than it was a few months back, but it still sees growth this year of 2.2 per cent, and next year of 1.2 per cent. Furthermore, earnings growth next year is forecast to be 4.3 per cent, more than double the rate of inflation. Oddest of all, the CBI sees little if any increase in unemployment next year.

All of which neatly illustrates the policy dilemma faced by the Bank of England's Monetary Policy Committee. The CBI wants an immediate cut in interest rates with more to follow next year. But if, as the CBI claims, the economy is grinding to halt, why does it not expect unemployment to rise? And if unemployment does not rise, how can the Bank be sure it is time to start cutting interest rates? Worldwide recession is going to have to close in on us very rapidly for the MPC to be convinced it is yet safe to do so.