Sunday, July 09, 2017
Businesses are hungry for certainty, not thin gruel
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

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My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

Businesses are troubled, and so are consumers. The election a month ago delivered the worst possible outcome in terms of the stability and certainty that the economy needs. The combination of a minority government and a Brexit negotiation that the minister responsible has described as more complicated than the first Moon landing, is undermining confidence.

This is not surprising. I wrote on June 11 that the hung vote would hang over the economy, and so it is, and we have the evidence. All three of the purchasing managers’ surveys, for the manufacturing, construction and service sectors, showed declines in June compared with May.

Their relative strength in the pre-election period will probably mean a slight uptick in quarterly gross domestic product growth in the second quarter compared with the very weak first. But the omens are not encouraging. May official figures for manufacturing and construction were weak.

Services are the dominant part of Britain’s economy and, according to its June purchasing managers’ survey, has seen both a drop in activity and a bigger fall in business optimism.

As Chris Williamson, chief business economist at IHS Markit, which complies the survey, put it: “It is clear that the economy heads into the third quarter losing momentum. With business optimism having been hit by the intensification of political uncertainty following the general election and commencement of Brexit negotiations, at the same time that households are battling against rising inflation, the indications are that the economy’s resilience is being tested.”

The latest GfK consumer confidence barometer, meanwhile, shows households too regard the political situation with concern. The barometer dropped by five points in the wake of the election to -10, a similar bow to confidence as the one that followed last summer’s referendum.

Households have become gloomier about their personal financial situation over the next 12 months, which showed a four-point drop between May and June. They are downbeat about the economy, with a balance of 23% of households expecting it to deteriorate over the next 12 months. People’s willingness to splash out, known in the jargon as the major purchase index, slumped by eight points.

This is consistent with the drop in new car registrations reported by the Society of Motor Manufacturers and Traders (SMMT). Private new car sales last month were down by 7.8% on a year earlier, and were down by 4.8% in the first half of the year. The SMMT separately reported a slump in car industry investment in the first half of the year.

You might say that, like the legendary Brenda from Bristol and her aversion to elections, most people have lives to get on with and do not spend them obsessing about the intricacies of politics. Neither do most businesses. If you said “minority government” to most voters they would not know what you were talking about. If you asked whether they think the government knows what it is doing, you might be closer to it.

Apart from the immediate political uncertainty, however, consumers have much to be downbeat about. I have commented before that, given the ret urn of falling real wages, the prime minister’s decision to call an election was courageous. Courageous in this context is being used in the Sir Humphrey, Yes Minister, sense; in other words foolish,

New official figures show that extent of it. The Office for National Statistics pointed out that real household disposable income per head in the first quarter was down by 2% on a year earlier, a very substantial drop in living standards. To put that in context, this meant that real disposable incomes were back to their level in the middle of 2009, in the depths of the financial crisis and the deepest recession in the post-war period.

What does the piling of uncertainty on uncertainty mean for the economy? The Centre for Economics and Business Research thinks the hit to confidence will hit growth by 0.4 percentage points this year and next, reducing it to just over 1% in each case.

We have, of course, had politically-generated uncertainty before, most notably in the wake of the June 2016 referendum, but it passed. One reason for that was that, apart from the rapid transition to a new prime minister and effectively a new government, with the promise of political stability. Calming measures by the Bank of England also helped.

Jan Vlieghe, a member of the Bank’s monetary policy committee, put it well in an Independent interview the other day. “One of the reasons it didn’t happen [an immediate downturn] is there was a sense it was just too far away,” he said. “So now as it gets closer there is a risk they start worrying again. But if a very strong sense is established that there’s going to be a lengthy transition deal then we go back to that previous regime where [firms think] it might all change but it’s not going to change for a long time so I can just get on with my business and not worry about it. That would be a very positive thing for business and investment and would therefore influence our interest rate policy.”

Even amid the political uncertainty, in other words, it would be better for the economy if businesses believe that they have many years to adjust to Britain’s new relationship with the EU. This is exactly the point that the CBI’s director, Carolyn Fairbairn, and her chief economist, Rain Newton Smith, made in speeches at the London School of Economics on Thursday evening, citing a “drip, drip” of investment decisions deferred or lost.

As Fairbairn put it: “Instead of a cliff edge, the UK needs a bridge to the new EU deal. Even with the greatest possible goodwill on both sides, it’s impossible to imagine the detail will be clear by the end of March 2019. This is a time to be realistic.

“Our proposal is for the UK to seek to stay in the single market and a customs union until a final deal is in force. This would create a bridge to the new trading arrangement that, for businesses, feels like the road they are on. Because making two transitions – from where firms are now to a staging post and then again to a final deal – would be wasteful, difficult and uncertain in itself. One transition is better than two and certainty is better than uncertainty ….The prize is more investment, more jobs and reduced uncertainty for firms here and in Europe.”

The CBI plan, which is backed by other organisations including the EEF, which represents manufacturers, is close to the one that Philip Hammond is arguing for within the government, though he has yet to win the argument. It does indeed make a lot of sense.

Would it end the uncertainty? Not entirely. For some businesses it will merely delay the inevitable. Those planning long-term investments will continue to err on the side of caution. Such is the weakness of the government’s parliamentary position that any pledges it makes would fall if it does. This is a genuine difficulty, created by the election.

So far they are not getting it, Business leaders who met David Davis, the Brexit secretary, at Chevening on Friday were offered thin gruel, not certainty. That needs to change, and quickly.