Government fiddles while economy burns...

There’s an ominous lead story in today’s Financial Times which suggests “senior government figures” are discussing whether they should buy out the remaining privately-held shares in Royal Bank of Scotland and fully nationalise it.
This would be an enormous step and, in a government led by the Conservatives, a surprising one.
It’s important to note right from the start that the story doesn’t quote a single named minister, but a series of euphemisms for high-level sources – ‘ministers and officials’, ‘some at the top of government’, and ‘one official’.
This smells to me like a story that has been floated by either political advisers to a minister, a senior Whitehall mandarin, or even a Lib Dem member of government.
These discussions are said to be drive by government ‘exasperation’ at the barriers banks continually put in the way of lending money to business.
That exasperation is almost certainly shared by business.
But I’d be amazed if this government nationalised any bank unless we lapse into another global economic crisis.
It flies in the face of Tory philosophy, would be hugely complicated, and the idea that government could force a state-owned bank to do things other banks won’t or can’t throws up all sorts of competition issues – never mind leaving the taxpayer exposed to much greater risk.
It would also take ages before the nationalisation process was complete and the state-owned bank was able to miraculously turn the financial tap on.
Nor would it alter three fundamental problems faced by our economy.
The consumer appetite for credit which lay behind so much of the boom expansion just isn’t there. Consumer credit markets have been shrinking. Some of that may be because cheap credit is not available, but so many people are still paying down debt.
Many businesses are reluctant to borrow, particularly that breed of privately-owned firm which hates the whole concept of ‘working for the bank’. For some of them, one of the key issues is not so much the cost of borrowing as the cost of basic facilities.
Then there is the stupefying spectacle of the eurozone’s inexorable crawl towards the next bit of sticking plaster, with one fix after another leaving markets pretty much convinced that the EU looks likely to fall apart like a melting icecap.
The problem for government is that, despite all this, it needs to be seen to do something. It’s actually floated plenty of initiatives – ranging from the Regional Growth Fund to yesterday’s Funding For Lending programme.
But they are progressing at a glacial pace – partly because government itself dismantled some of the very structures which used to get money spent at the grassroots (think East Midlands Development Agency).
Neither is it marketing and communicating some of these initiatives properly (here again, it got rid of the long-established Central Office of Information, which had a presence across the regions).
Banks are a problem. So is the expectation that there are quick fixes to enormous structural economic problems which go well beyond these shores – throwing money at our economy won’t make a key export market any better.
But nationalising RBS would be a government fiddling while our economy burns.

MIPIM: Another away win for Nottingham

It began in Derby, wandered through some of the best cities for business in Europe, and ended in a pizzeria not far from the yachts that bob up and down in Cannes harbour.

Such was the second day at MIPIM.
I reflected yesterday on what Nottingham had to offer the biggest property and development exhibition in Europe, but today began with a breakfast reception for what is grandly characterised as the Derby Embassy, the slogan for the travelling show that is Marketing Derby.
Unlike Nottingham, Derby has managed to pull together a comparatively substantial public sector budget which supports not just the activities of Marketing Derby but a walloping chunk of commercial projects ranging from phase one of a spec office development in Derby (elsewhere, no one digs earth without a prelet) through to a comprehensive revamp of Derby City Council’s HQ, and half the lease of the old Egg call centre (a deal which has enabled Indian-owned Hero TSC to set up a similar operation in the same building).
Fair play to Derby. It punches above its weight at an exhibition where many similarly sized conurbations simply don’t figure, and has a cohesive message which other locations will be jealous of (notably Leicester, which I’ll come on to in a moment).
The strength of its focus has already been well-illustrated by its refusal to take the decision which lost Bombardier’s Derby factory a huge rail contract lying down, and the fuss it made has almost single-handedly led to government looking again at the whole issue of large-scale public procurement rules.
Leicester, by contrast, is a curiosity. This is another substantial Midlands city which has a strong economy with plenty of hefty businesses and logical opportunities. So why isn’t it at MIPIM? The few people from Leicester who are here certainly felt jealous of what Nottingham and Derby are up to, wondering why there was no marketing material about their own city to hand out.
England’s provincial cities do get noticed at MIPIM because they talk tangible opportunities rather than grand, barely believable visions. Birmingham and Manchester have thrown several hundred grand at their presence and there is an expectation that they will be here.
Even though its presence is comparatively small-scale and supported by the city council rather than paid for, Nottingham’s presence has been discreetly effective. It made headlines on one of the big property consultancy stands, and it was rubbing shoulders with some of the biggest locations in Europe yesterday when it received an award as one of the best micro cities for business.
The award came from FDi Intelligence, a division of the Financial Times, and ranked Nottingham ahead of Geneva as a business-friendly location.
Stockholm, which won the main FDi award, has plastered its name all over the entrance to MIPIM. I’m not suggesting Nottingham should do the same, but there is every logic in gently ramping up the city’s marketing budget to support an award which has put us front and centre on an international stage.
Those who don’t come to MIPIM will inevitably focus on the yachts and the money because they make easy pictures and easy headlines. For many cities, that’s just not what MIPIM is about.
Sure, there will be some cities smooching would-be investors at some very expensive tables in Cannes. But not Nottingham. Last night it was largely in a pizza parlour reflecting happily on another day and another good win.

Oil: a crude assessment?

It was Supermac, the 1950s Tory Prime Minister Harold Macmillan, who famously said it was “events, dear boy, events” which could blow people off course.
What’s happened in Libya during the past few days has certainly blown my theories about the impact of oil on inflation off course.
While rising oil prices were fingered several times as the culprit in the last UK inflation figures, I’d read that the Saudis had quietly been increasing production to help take the sting out rising prices. Hence my blog ‘Oil’s well with inflation’.
Well, for the moment you can forget that idea. Fuel prices are going up again, at least partly because of the decision to shut down some of the oil wells in beleaguered Libya.
This has set hares running about the possibility that prices will rise so much that we are in for an ‘oil shock’, a spike in the price which is so pronounced that it sucks the life out of economic recovery.
This would be scary stuff. The price of oil has already been rising because of massive demand among fast-growing economies like China, and an additional spike would be felt right in the pockets of people and businesses.
An excellent analysis by Gavyn Davies in the Financial Times suggests that is, if you’ll pardon the pun, a crude assessment.
He gives some useful facts. Libya’s oil production is less than two per cent of the world’s total, the International Energy Agency estimates there’s enough oil in reserve to supply more than double Libya’s output every day for more than a year, while the other OPEC countries have spare production capacity which exceeds even that. Indeed, Saudi Arabia is already in talks about increasing production again to try to take the heat out of any spike.
But the spike in oil prices is not just about a tap being turned off in one corner of the market. It’s also sparked by fears about what will happen to bigger oil states in the wake of overthrow and disorder in Tunisia, Egypt, Bahrain and Libya. How Saudi Arabia handles pressures for greater democracy is the one to watch: like Communist China, the kingdom has tried to keep its people happy by spreading the wealth (in a way which the one-eyed rulers of Tunisia, Egypt and Libya didn’t).
Gavyn Davies’ conclusion is that a short-term spike in oil prices is something people can live with – if you look back at short-term economic ‘events’ of the past, people usually find a way of muddling through, dipping into savings here, cutting back on spending there. Libya’s oil production is unlikely to be lost permanently, whatever happens to Gaddafi.
Those of you with long memories (or grey hairs) might recall the oil crisis of 1973-74. Then, the decision of the US to keep arming Israel in its conflict with Egypt saw Arab oil producers hit back with an embargo on oil production. Prices rocketed overnight and economic growth fell over. The UK government even went as far as printing and issuing petrol vouchers, though they never came into use.
We are not in that kind of territory, and oil would have to rise far above its current price and stay there for sometime for it to knock the stuffing out of global economic growth.
The immediate challenge for the UK economy is what the Bank of England does about rising inflation, which could well tick up again because of a short-term rise in oil prices.
Does it put up interest rates to try to rein in all this inflation, or leave them where they are as business and consumers struggle in a weak economy with rising prices?
That’s an event to keep an eye on.

Economic soundbites and a speech that matters

There have been two big economic stories over the past 48 hours. One of them has big implications for business in the long-term, the other for politics now. You can guess which one hogged the headlines.
The release yesterday of the first impression of the UK’s economic performance in the last three months of 2010 got hijacked by a yawn-worthy shouting match between Government and opposition. The most informed analyses came from Stephanie Flanders, the BBC’s economics editor, and Gavyn Davies of the Financial Times.
Neither characterised the figures as an unmitigated disaster, while Davies said that because they varied so much from the aggregate of surveys tracking the performance specific industries he didn’t really believe them.
Anyway, the point is that those figures are not where the action’s really at. A much more telling contribution to the debate about where UK business goes from here was provided by Sir Richard Lambert.
It’s the last speech Sir Richard has given in his role as director general of the CBI. Once again, one particular theme in his speech got well and truly ‘politicked’ after the CBI emailed out advance copies to media organisations.
I’ll digress for a moment and explain why this happens. The reason is that this one theme – that the Government hasn’t said nearly enough about policies for business growth – plays to a political agenda currently being driven by the big unions.
The GMB, for example, is in the midst of a PR campaign which involves emailing journalists across the country with round-ups about public sector job losses which it says are ruining the recovery. Whether you agree or not, it’s an effective campaign and in the absence of another narrative from government it’s made the running.
Len McCluskey, the incoming boss of one of the big unions, Unite, went so far as to suggest that Sir Richard’s speech showed that the CBI and the unions are now singing off the same hymn sheet. He clearly didn’t read all 14 pages of it.
Thanks to the good offices of Paul Southby, the Nottingham lawyer who did a sterling stint as the CBI’s regional director, I had a couple of long chats with Sir Richard during the depths of recession. He is a hugely intelligent and very measured man, and anyone who characterises his speech as a political pot-shot is wide of the mark.
And the really important point is not what he says about what the government hasn’t done, but what he says about what it should do. That section his speech – which is much longer than the bits which suited the current news agenda – wasn’t covered at all.
I’ll come on to that in a moment. Sir Richard’s speech contained a useful recap of why the economy is where it is now and why, in his view, public spending would have been slashed even if Labour had been re-elected.
Granted, the coalition has gone about the cutbacks in an uncompromising fashion, but two statistics tell you why public sector retrenchment of one flavour or another was inevitable. Government spending last year was around 3 per cent above the original forecast made by then Chancellor Alistair Darling two years ago. But Government tax revenues meant to fund it were a whopping 13 per cent lower than expected.
Plummeting tax revenues are a measure of how much business activity has fallen out of the economy. Much of it will never come back, leaving a permanent hole in Government budgets. Tellingly, Lambert says that regardless of the economic cycle, “the tax and spending policies of the last government created a substantial structural deficit…that’s what made substantial spending cuts inevitable” (I’d be amazed if Len MCluskey is on the same hymn sheet as that).
So Sir Richard’s speech wasn’t a one-sided attack on the coalition. He poured scorn on the idea that higher business taxes would help plug the deficit, pointing out that this would be an even bigger long-term drag on jobs and growth than the public sector cutbacks are now.
His take is that the ingredients for a private-sector led recovery are definitely there: many businesses have cash in the bank because they cutback in recession, significant opportunities for growth lie in areas like the UK’s power generating infrastructure (which has to be upgraded to meet future demand) and manufacturing-led exports, where the weak pound is beginning to pay off.
So what’s lacking? This is where the serious criticism kicks in: business needs confidence to get spending and investing, but it’s lacking because the government has been far too slow in outlining its policies for supporting business growth.
And those policies that have impacted on business so far – the immigration cap, the localism agenda, the introduction of Local Enterprise Partnerships – have been woefully ignorant of the law of unintended consequences.
Finally, here’s the bit that matters. Beyond those soundbites (which most media focused on) Sir Richard went into some detail about what the Government now needs to do to unlock the growth potential the private sector can deliver.

Long term

• Put a relentless focus on the development of human capital (education, skills, training) and physical infrastructure (power, transport, digital). And do it across the regions to tackle our lop-sided economic geography. So the message for government is that it must invest again once the deficit is tackled

Short-term

• target policies which help small to medium enterprises, NOT large businesses. SMEs, says Sir Richard, are the main source of new jobs in the UK and successful ones are spread all over the country (so fewer ministerial photocalls with big companies!)
• Don’t fall into the hoary old political trap of trying to back ‘winning’ industry sectors. Sir Richard cites fascinating research by our own Experian here, which points out that innovative, ‘growth champions’ are NOTdefined by industry sector – they are defined by the “entrepreneurial zip” of management and an innovative approach. Experian’s research shows it can happen in any industry, anywhere.

Sir Richard says: “What politicians find it difficult to get their mind round is that it is just as possible – and important – to be an innovator in the brick making industry as it is in biosciences. And innovation is not confined to the South East corner of England.”
It follows that if government launches initiatives which back sexy industry sectors it will almost certainly exclude massive numbers of businesses with great potential for growth. So government has to concentrate on policies which support firms which display certain characteristics, not certain SIC codes.
Sir Richard criticises politicians for placing huge emphasis on trade with India and China when UKTI, the Government’s export advice service, would be better supporting these smaller firms trading with Europe.
He says the government’s lukewarm attitude towards Knowledge Transfer Partnerships – which put postgraduates into innovative work in companies – makes no sense when evidence suggests the scheme costs peanuts but delivers significant economic benefits.
Then there’s finance. Again, he says the emphasis should be on making sure cash gets through to those growth champions, not setting one-size-fits-all lending targets for banks based only on a number.
Sir Richard says he isn’t looking for the Government to come up with a five-year, Soviet-style blueprint for the economy. If you read between the lines, he would probably attach a health warning to any slogan-led grand plan.
And there is no succour in this for the public sector or for unions, despite the soundbites. Sir Richard’s analysis is grounded in hard, economic facts presented in a non-partisan manner.
You get the impression he feels politicians have failed the economy once and that we can’t afford it again.
Here’s hoping Vince Cable read all 14 pages, not the news channel soundbites.