Pre-Budget statement: Optimistic forecasts leave investors in guarded mood

THE CITY gave a mixed reaction to the Chancellor's speech yesterday. Gilts soared more than a point as investors took comfort from Gordon Brown's upbeat remarks about growth and borrowing. However, commentators complained there was little of substance to counter the slide in both shares and the pound.

The FT-SE 100 index of leading shares closed down 21.6 points at 5503.9. Sterling, which has weakened steadily recently in anticipation of a cut in interest rates tomorrow, fell back a quarter of a pfennig to Dm2.75.

Economists attacked MrBrown's forecasts of a dip in growth next year followed by a recovery in 2000 for being "widely optimistic", and warned that further adjustments may need to be made by the time of the spring Budget.

Brian Hilliard, UK chief economist at Societe Generale, said that the absence of any reference to possible spending cuts might make the Bank of England less enthusiastic about aggressive cuts in rates.

"We weren't looking for any savage adjustment. But there should have been at least some token cutback in spending. The momentum for a downturn is not so easily broken as he seems to believe," he said.

His views were echoed by Adam Cole at HSBC: "The striking thing is his optimism on the outlook for the economy. In terms of hard policy changes, there is not much."

The supply-side measures were largely dismissed by City commentators as too intangible to make much difference in the short-term.

Bob Semple, a strategist at BT Alex Brown, the investment bank, said: "I can't find anything widely exciting. If the economy is going south over the next three months they may have to do more on the fiscal side."

Patrick Stevens, a partner at Ernst & Young, was also sceptical. "The focus on finance and venture capital and tax credits for research and development are all useful. But we have had consultations and talk about all these issues before. We must have action in the next Budget rather than trying to design something perfect."

Dr Ian Peters, the deputy director-general of the British Chamber of Commerce, welcomed the package of measures to encourage productivity and promote investment, as well as the review of small firms' access to finance. However, he insisted the "acid test" for business was whether the forecasts for growth and borrowing were "realistic and achievable". Unless rates were cut by half a point tomorrow, the slowdown forecast "would turn into a slump".

Adair Turner, the Director-General of the Confederation of British Industry, welcomed the fact the Chancellor intends to consult with business. He said he was particularly pleased the Chancellor had taken up the CBI's ideas on growth and innovation, especially for small business, but urged that the consultation be widened to include some key technical issues on capital gains tax and advanced corporation tax.

The Association of British Insurers said there was still some concern among its members that even though nothing was said on pensions taxation issues this time, further changes to the pensions tax regime may be included in the spring Budget.