Tax increases spark recovery fears: CBI and construction chiefs call for further cut in interest rates

THE Confederation of British Industry is expected to renew its call for another cut in interest rates today as its quarterly survey of manufacturers reflects worries about the strong pound and as the political row continues over the tax increases looming in April.

The Chancellor of the Exchequer is thought to be cautious about another cut in interest rates, preferring to hold it in reserve until the tax increases have been imposed and the local and European elections in May and June are closer.

City economists are expecting the CBI survey to show that the strength of the pound and the weakness of Britain's overseas markets have made manufacturers less confident about export prospects, but that domestic orders should still be holding up. The CBI is expected to argue that a rate cut can still be justified, although it is unlikely to echo the warning last week from the British Chambers of Commerce that recovery is 'flattening'.

'Overall we would expect the general tone of the survey to point in the direction of continued recovery,' said Darren Winder, economist at Warburg Securities. But the level of optimism recorded in the survey would have to drop dramatically to suggest that the recovery was going into reverse. The survey has tended to paint a much more erratic picture than data from the Central Statistical Office.

Economists at Midland Bank cast doubt on the likelihood of the CBI showing a deterioration in export prospects. 'A recent Gallup survey suggests a dramatic improvement, with worries over the strength of sterling apparently more than offset by the prospect of tariff cuts under the recent Gatt deal,' they said.

The looming April tax increases are expected to have only a limited impact on the quarterly trends survey. The latest Gallup survey of consumers showed little sign that people expect a significant impact either on the economy or on their own finances. However, the arrival in many homes last week of new tax codings has left the Inland Revenue inundated with queries.

An upbeat picture of the economy will be painted by the construction industry this morning when the Building Employers Confederation releases the results of its latest quarterly trade inquiry.

The survey is expected to report better prospects now than at any time since the onset of recession in the industry nearly four years ago.

However, the BEC is likely to repeat its call for an early cut in interest rates to stimulate industry and consumer confidence and help offset the impact of this spring's sharp increases in taxation.

One of the key indicators in the BEC's survey - expected workload over the next 12 months - is beginning to point upwards for the first time since 1990.

After 13 successive quarters of decline, construction output is showing a small increase while contractors are much more optimistic about future output.

This is in sharp contrast to the BEC's October survey showing that a majority of firms expected output to decline or at best stabilise in the coming year. Only a fifth reported that output had increased and only a third were confident of further increases in the next 12 months.

The BEC's survey was contradicted last night, however, by a rival forecast suggesting only a marginal increase in construction activity over the next two years.

The Joint Forecasting Committee for the Construction Industries believes the short-term outlook is more subdued than might be expected at this stage of recovery.

The committee, an independent group of City analysts, economists and construction executives, says the building recovery will be held back by cuts in public expenditure programmes, a slower than expected pick-up in private construction and delays in big schemes funded jointly by private and public money.

This week will also see the publication of the December estimate of Britain's trade deficit with countries outside the European Union. This is on average expected to show a slight improvement from November's pounds 767m trade gap.