In its latest monthly Industrial Trends survey showing manufacturing orders at a five-and-a-half-year low , the CBI downgraded its forecasts for overall economic growth but said it still expected a 'soft landing'.

The CBI's chief economic adviser, Kate Barker, said: "We now expect economic growth over the next three quarters will almost grind to a halt, so we believe an early cut in interest rates is vital to prevent the economy slipping further than necessary."

It would still be possible for the Government's inflation target to be met after an interest rate cut, Ms Barker added.

The CBI predicted Gross Domestic Product, the main measure of economic growth, to fall to 1.5% by the end of the year and 0.9% by mid-1999 before climbing back to 1.5% by the end of next year.

This would broadly decribe the 'soft landing' for the economy the government and the Bank of England have predicted.

The CBI said it expected official interest rates to fall 0.25% to 7.25% by the end of 1998.

It said while a hard landing is not expected, there are more risks of the economy stalling than last May with the problems facing the export sector having a knock-on effect in the domestic market.

Manufacturing conditions worsen

Total orders for British manufacturers hit their lowest level in more than five years with 41% of firms reporting order books below normal while only 10% per cent said orders were above normal.

This gives an overall negative balance of minus 31%, unchanged from July and worse than June's minus 24%.

CBI says full-blown recession unlikely

Meanwhile, the survey showed export orders slipping back to their levels of May, which were the lowest since 1983.

The export orders balance was at minus 51%, slightly worse than previous months while the output expectations balance stood at minus 15% this month compared to minus 8% in July.

There is no sign of of the recessionary pressure easing on UK manufacturers, the CBI said.

Two-speed economy

The latest economic statistics showing record mortgage lending on one hand and five-year lows in manufacturing orders on the other confirm widely differing conditions across the British economy.

The UK home lending market remains buoyant with mortgage lending jumping to a record £5.7bn in July, according to figures released by the British Bankers' Association (BBA).

The figure was 14% higher than June lending, confirming the housing sector as one area of the economy maintaining strong growth.

The two sets of figures provide more evidence of the so-called 'two-speed' British economy with some areas, like housing and services, experiencing continuing growth while others, like manufacturing, slip into recession.

This varied performance makes it harder for the Bank of England to judge the appropriate level of interest rates as it attempts to engineer a "soft landing" for the economy.