George Pitcher: US economy is certainly a barometer for the UK

The CBI says the UK economy is slowing: the Government says it is not. Take no notice and watch the US, as what happens there really matters. By George Pitcher

So, the CBI turns out to be wrong again. I suppose that we shouldn’t be too surprised – the CBI’s capacity for making a fool of itself is matched only by the Conservatives’ ability to be almost entirely out of touch with the political desires of the UK population. But the degree of its error this time is a considerable achievement even by its own spectacularly low standards.

Earlier this month, the CBI published one of its regular reports, claiming that business confidence in the economy had suffered its biggest drop since January 1999, with investment intentions turning sharply negative. Then, last week, the Government published its own figures, which showed that business investment rose by 0.8 per cent in the first quarter, with manufacturing investment up 9.4 per cent – its largest rise since 1998.

Investment in the retailing industries was up an encouraging 11.1 per cent. Even other service industries, where investment had been unduly distorted last year by the silly boom in spending by telecommunications companies, was only down by a modest correction of 1.4 per cent. Overall, Treasury figures indicate that the slowdown in the UK economy might be saucer-shaped – that is, shallow and short.

It’s not easy to know how the CBI can be so wide of the mark. But one might conclude that it is as politically motivated to run scare stories about the economy being on the verge of collapse as the Government undoubtedly is in its determination to get out the pre-election news that the UK economy is actually in good shape.

I’ve said before that the CBI is an anachronistic repository of old Conservative values, if an obsession with post-Thatcherite boom-and-bust monetarism can be called a value. It was the economic philosopher John Stuart Mill who dubbed the Conservatives “the stupidest party” and the opinion polls (other than those by the CBI, of course) would seem to suggest they are doing nothing to shake off that reputation. It follows that the CBI’s economic analysis is likely to accord with Mill’s observation.

But while the CBI tells us one thing and the UK industry that it allegedly represents resolutely does another, we’re still entitled to wonder about the prospects for UK business post-election. Former US president Bill Clinton’s trenchant contribution to political debate in the Nineties was to observe that the issue of electability could be summarised in the phrase “it’s the economy, stupid”.

He could be addressing the CBI today, because the immediate prospects for UK business aren’t about our investment confidence, nor about the CBI’s dreary pre-occupation with interest rates, nor even primarily about our prospects for joining the euro in the next parliament. Our business prospects are about the US economy.

This is an unpopular thing to say currently, but I say it for a variety of reasons. The first relates to the simple importance of the US to our exporters of goods and services. Leisure group Bass was a paradigm for this reliance on US markets when it reported results last week. Pre-tax profits in the 28 weeks to mid-April fell by £3m to £303m, largely as a result of weakening performance in its Intercontinental and Holiday Inn chains in the US. That’s not much of a hit yet, but it’s the shape of things to come for the full year and Bass is taking the opportunity to warn investors of the effects of a US slowdown on its business.

My second reason for our immediate economic fate resting in US hands is what an equities analyst friend of mine calls “the Barbarossa effect”. There is a sleeping giant in the US economy in the shape of international investment banks with a desire to talk up any corporate deal in the beleaguered telecoms sector as evidence of a recovery. They are doing this to try to recover some of their loss-making investments of last year. Any such false dawns can only serve to make America’s economic night darker.

My third and final reason relates to the UK’s unnerving reliance on the US economy, by reason of it being insufficiently related to the European economy. Economists are making much of the fundamental resilience to world economic downturn of Europe in comparison with the US. That may be so, but so long as we are not a proper part of the economic union – by which I mean outside the euro-zone – we are not in a proper position to benefit from that relative resilience. A returned Labour Government will doubtless endeavour to take us into the euro as quickly as is feasible, but it may be too late.

All of this somewhat flies in the face of the prevailing wisdom that our economic slowdown will be saucer-shaped, while the US’s will be rather more bucket-shaped. The Government, of course, has an interest in us not rumbling this until after June 7. It can’t be blamed for the state of the US, but voters don’t think like that and Labour knows it.

I don’t take lightly the role of prophet of doom, particularly when there are so many prophets of boom about. But the US is where our cause for lack of confidence should rightly arise. The truth is we won’t ride out a US recession. Meanwhile, the CBI would probably have us believe that the US is poised for a period of unbounded growth.

George Pitcher is a partner of issue management consultancy Luther Pendragon


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