A surprisingly sunny scenario
Martin Vander Weyer finds CBI chief Richard Lambert in an unexpectedly upbeat mood, despite threats to British business from the credit crunch and a dangerous surge in inflation
‘I will now paint you the sunny optimist’s picture...’ Richard Lambert, director-general of the Confederation of British Industry, is warming to his theme.
And in many ways it’s a surprising, even contrarian, theme, since he has just told me by way of an opener that the current credit crunch is as serious as anything he’s seen in a career of more than 40 years – 35 of them as a Financial Times journalist and editor, a three-year stint on the Bank of England’s Monetary Policy Committee, and at the CBI since 2006.
‘It’s a global shock on a substantial scale and we haven’t yet seen the end of it,’ he says, much worse than the banking crisis of 1973-74, which really only affected the City: ‘I can remember going to see friends in the countryside and saying, “You realise that capitalism has nearly come to an end?” and they’d say “What?” It didn’t have a big impact on the real economy. It was oil prices that did that.’ But this time round, the financial crisis really is a big one. ‘Paul Volker [chairman of the US Federal Reserve before Alan Greenspan] has called it “the mother of all crises”, and I think I’d go along with him.’
What’s more, we were talking in the week that the Governor of the Bank had to write to the Chancellor to tell him that inflation (on the relatively understated CPI measure) is set to rise above 4 per cent and to stay well above target next year. Yes, Lambert acknowledges, that’s a big one too. ‘It’s the issue our members are most concerned about. Energy and other input costs are rising at their fastest for many years. The question is: can the first-round impact of this inflationary pressure be contained? Where we went wrong in the Seventies was that oil and other prices shot ahead, central banks and governments failed to contain them, and they were translated into accelerating wage inflation.’
‘But,’ he observes in his benign, professorial style – a pleasantly cerebral contrast to his testosterone-packed, tub-thumping CBI predecessor, Digby (now Lord) Jones – ‘If you look at wage inflation now, it’s subdued. And remember that oil prices have been accelerating dramatically for several years and that has not yet passed through into a long-term surge in inflationary pressures.’
This is where we come to the sunny optimist’s scenario: ‘It goes like this: the second-round effect of energy price increases is contained, which means wage inflation doesn’t go up. Energy prices stop going up – they don’t have to fall, they just have to stop going up, because the economy now is clearly growing below trend rate and spare capacity is building up. That will have a downward pull on inflationary pressures over the next 18 months.’
But if you’re Mervyn King or Jean-Claude Trichet of the ECB or Ben Bernanke of the Fed, ‘you’re still going to have to be tough’, Lambert says. You’re going to have keep your eye firmly on inflation expectations, which are starting to pick up and could derail the sunny scenario by provoking higher wage claims. But again the optimist breaks through: ‘I’d very much hope it doesn’t mean rising interest rates. It definitely means not cutting rates or not cutting them significantly. But the argument against raising rates is that the Bank of England has to look forward: rate changes don’t have an effect on the economy for about a year, so the Bank has to think what’s it going to be like this time next year, not this time next week. And this time next year there will be spare capacity. The other thing is that the mechanism by which Bank Rate changes flow through the money markets isn’t working properly: Bank Rate is three-quarters of a point beneath the three-month inter-bank rate. In effect there’s already been a significant tightening of money markets without Bank Rate going up.’
Are his CBI members suffering not only from de facto tighter money, I wonder, but tougher terms from their cash-strapped bankers? ‘There’s an interesting picture,’ Lambert says. ‘If you look at the Bank of England quarterly credit survey for March, it was a bleak story: it said credit conditions had tightened, and were going to get a heck of a sight worse. But our surveys of members are not saying that – maybe because the Bank is asking bankers and we’re asking borrowers who haven’t been to see their bank managers lately. A lot of small businesses fund themselves largely out of retained profits. Sure, those that have been to the banks for money recently say the terms and conditions have got tougher, but they’re not yet feeling the pinch the way they did in the early Nineties.’
If companies’ ability to borrow is not yet at risk, then the key factors in their survival equation are energy and wage costs. On the latter, Lambert again sees reasons to be cheerful. ‘Thanks to reforms going back to Mrs Thatcher, but sustained over the last dozen years, the labour market works much better than it used to. During the period of rapid growth, employment numbers didn’t rise as much as you would have expected and wages didn’t grow as much as you would have expected. My hope is that in the slowdown, unemployment won’t rise dramatically: that’s what our members tell us. I see the Labour market as a stabilising influence.’
This also happened to be the week in which the Shell tanker drivers won themselves an inflation-busting settlement by threatening to disrupt petrol supplies (see Mike Millar’s article on page 40), but Lambert doesn’t foresee a return to the bad old days of union militancy – at least not in the private sector. ‘Union representation in the private sector is now only around 16 and a half per cent, nothing like the Seventies. It wouldn’t be surprising to see greater pressure for wage increases because people’s real living standards are being squeezed, so I expect negotiations to get tougher. But I sense another big difference from the Seventies and Eighties: nowadays employees understand there’s a trade-off between accepting constraint in wage inflation on one hand and maintaining jobs on the other.’
And there’s another factor helping many of his manufacturing members, even if it is adding to inflationary pressures in other respects: the weak pound. ‘One of the few positive trends for the next 18 months is that it looks as if trade will make a positive contribution to growth because imports are becoming more expensive and exports are becoming more competitive. My own feeling is that sterling has been overvalued for nearly 10 years, which is one reason the manufacturing sector has taken the hit it has. So a bit of devaluation is no bad thing.’
So far, in this tour d’horizon of business conditions, we’ve put a more or less positive tick against the banks, the workforce and the pound. But what about the embattled Labour government? Can it do more to help? Are ministers even listening?
‘They’re very accessible,’ Lambert chooses his words carefully, singling out John Hutton for praise as a Secretary of State for Business who’s prepared to stick his neck out on issues such as nuclear power. ‘We’ve just had the first meeting of the Chancellor’s new tax forum, discussing competitiveness with lots of serious chief executives of big companies,’ he goes on. ‘And yesterday [Alistair Darling] had a session with the big cheeses from the City. He invited them to say anything they wanted to, but they didn’t say much actually. Boris was there and he leaned forward and muttered, ‘Why aren’t they kicking his head in?’ I pretended I hadn’t heard.’
Talking-shops are all very well, I suggest, but what about action – for example, on lower business-tax rates? Lambert is pragmatic. ‘The Treasury is constrained by the fact that the public finances are not where they ought to be. There’s no wriggle room. That was the problem with the capital gains tax debate. You could say “This is all a terrible mistake”, but it was clear that they need the money. And the problem is growing because the Treasury’s forecast [for tax revenues] is, to put it politely, rather on the optimistic side. Every PAYE month that comes, the numbers must look worse.’
Still, he argues, ministers seem to have taken one important thought on board: ‘Do we need to do things on the regulatory side now that would damage business confidence at a difficult time, or can we shove them into the long grass?’ So he’s not expecting more bad news from the red-tape battlefront. Beyond that, he’d welcome some smoke-signals from Whitehall that would at least quell the flow of companies threatening to leave the country.
‘Uncertainty in business tax is a serious disincentive to investment. So as a cheap-and-cheerful one-off I’d welcome the Chancellor saying, “This is where we now stand on the question of foreign profits tax. These are the issues that in our mind have been resolved, and these are issues which we need to think more about.” That would be helpful. Another thing they could say, stronger than they’ve said before, is, “It’s our intention over time to build a more simple structure [of business taxes], with a degree of predictability.” That would help too – and it wouldn’t cost them anything, which is just as well!’
Much of Lambert’s time at the CBI is spent touring the regions, visiting real businesses and talking to the people that run them. He also takes a keen interest in new science-based ventures coming out of, and clustering around, universities such as York and Warwick; he is about to become chancellor of the latter. So is his non-doom-laden outlook based on sightings of green shoots out in the field, as well as his distinctive analysis of the big picture? Yes, it is, and a change in his tone – from professor back to eager FT reporter – tells me he relishes that part of his job.
‘My favourite story since I’ve been here is a company called Randox Laboratories, in very green countryside to the west of Belfast. It’s a small company making diagnostic equipment, and every time they come up with a new product they buy a new barn to put it in. The chief executive Peter Fitzgerald and his team are brilliant engineers from Queen’s University, Belfast – and his mum is on the board. Peter Fitzgerald won the MacRobert Award for engineering, which you only get if you’re a genius, and they’ve developed a diagnostic bio-chip that they reckon is a number of years ahead of GE [the giant US technology group]. It’s just an astonishing story.’
‘And we just had our First Women Awards ceremony for women in business: there were lots of remarkable stories, but the one that stuck in my mind was Rosalind Murray, who’s a manager at BAE Systems at Barrow-in-Furness, where they build the nuclear submarines. She made this very good acceptance speech and finished up saying, “We’re going to develop a new way of building submarines!” Her confidence was amazing.’
‘You really are a sunny optimist, aren’t you?’ I concluded, unnecessarily. Lambert paused momentarily, perhaps searching in vain for something to add, for balance, on the downside. ‘Put it this way,’ he summed up, reverting to professor-with-inattentive-student mode. ‘It’s clear that over the last year the short-term outlook has significantly deteriorated, because of the rise in energy costs and mounting credit constraints. But what I see is a business sector that is pretty robust, that has had some good years and whose balance-sheets are not in bad shape. And I see forces for stability in the labour market and in manufacturing, partly because of sterling and international demand. Our forecast is still for modest growth next year.’
And your worst-case scenario, director-general? ‘Well, whereas at the turn of this year I was as confident as I could be that there wasn’t going to be a recession, I’m not as confident about that now. Frankly, who knows. But my sweep through 300 years of financial history reminds me that capitalism is very resilient. Do you want a fact? Of the 255 examples of recession in 17 Western countries between 1871 and 2006, 164 lasted just one year. Doesn’t that please you?’
Martin Vander Weyer is editor of Spectator Business and business editor of The Spectator