Like a climate scientist at an airshow, our new government stands accused of ruining everyone’s fun by droning on about reality. Business groups have begun to warn that Starmer and Reeves’ repeated use of phrases like “black hole” and “pain” are causing a dent in confidence that could actually harm the economy. Can anyone really talk a country into recession?
The latest intervention came in a speech to the CBI’s annual dinner in Glasgow last night, in which the business lobby group’s CEO, Rain Newton-Smith, warned that investment in the UK was not being helped by the government’s aggressive Eeyorism: “We get the need to take a hard look at the economy,” she said, “but at the same time, I think the more we focus on that difficult inheritance, the harder it is in global boardrooms to make the pitch to invest in, come to, and stay in the UK. I think we must also have, and offer, hope.”
Newton-Smith is backed up by the Institute of Directors’ (IoD) economic confidence index, which fell sharply on 1 September as British business leaders revised their expectations for the UK economy. The IoD’s chief economist, Anna Leach, said: “The newsflow in recent weeks on employment rights and autumn tax rises has dented confidence in the environment for business in the UK.”
Aside from the use of the word “newsflow”, which presumably describes the big pipe underneath Fleet Street into which we journalists pump articles, the most concerning point about the IoD’s index is that the sharpest falls were in business leaders’ expectations for investment and headcount. If businesses slow their buying and hiring, this impacts the labour market, which is fundamental to economic growth.
However the IoD’s index is a survey of what around 750 business leaders think, and opinion is volatile. The more revealing measures are purchasing managers indices (PMIs), the reports that banks and ratings agencies compile on what businesses are actually doing – how much stuff they’re buying, the orders they’re working on, how many people they’re hiring – and many of these do not currently agree with the expressed opinions of lobby groups. NatWest’s latest regional PMI finds that business activity rose in every part of the UK in August. The services sector, which is most of the UK economy, reported a sustained “post-election upturn in business activity and new work” when surveyed for S&P Global’s latest services PMI. In the housebuilding sector, business activity is rising at the fastest rate for two years.
In any case, I’m not convinced it is possible for any government to talk a country into recession. If it was, this would surely have happened in the US in 2022, when what one economist described to me at the time as “the most telegraphed recession in history” didn’t show up. In June of that year the head of the world’s largest bank, JP Morgan, told investors to expect “a hurricane”. Bloomberg Economics’ confidence in a US recession in October 2022 was 100 per cent. It didn’t happen.
As doom-laden prophecies go, it’s hard to out-grump the Bank of England’s November 2022 forecast, which suggested that the UK was about to enter the longest recession for a century. Again, this didn’t happen.
It’s worth taking a moment to thank the people who saved us from these downturns, and those people are us: in both the US and UK, consumers have reduced their overall debt since 2008 and saved significantly during the pandemic. A lot of people did prudent things like locking in longer fixed-rate mortgages and building up bank deposits that would actually benefit from higher interest rates. As a result consumer confidence – buoyed by the spending of a retiring Boomer generation – has held up in the UK (and especially in the US) even as many voters have assumed, incorrectly, that their country is in recession.
It’s also worth remembering that the CBI and the IoD are lobby groups that exist to push the aims of their members. Business owners may well disagree with policies such as increased workers’ rights, or closing the tax loopholes that allow them to, for example, pass on shares in certain companies without paying any inheritance tax, and that’s fair enough. These policies will cost them money and they have every right to disagree with them. This is a key moment to do so, just before the Labour Party Conference, which starts 22 September, and the Budget on 30 October.
This is the point at which the previously cordial relations between the business community and Labour start to fray, then. Expect more intense lobbying as the Budget draws near, and perhaps more intense doom-saying from the government. A high-profile business may well announce, perhaps through an interview with the Telegraph, that it is off to somewhere less taxing. That won’t change the state of the public finances (which are, on the subject of doom, on an unsustainable trajectory) and the need for policies that repair them.
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