CBI: Private sector growth key to UK prosperity

Attracting foreign manufacturing companies to the UK is increasingly difficult as other countries up their game, business leaders say

A handful of the land's most powerful politicians are expected to turn up at the CBI's annual business and industry jamboree in London on Monday.

While members of the coalition government are unlikely to get a standing ovation for last week's Spending Review, many of the announced measures have been welcomed by business leaders.

And according to a CBI telephone survey of 120 chief executives and company chairmen, two-thirds say the business climate in the UK has improved since the coalition came to power in May.

"If the fear had been that the coalition would be unable to do anything, then that has been firmly displaced," observes CBI's director-general Richard Lambert during a pre-conference briefing.

But before business leaders are prepared to hail the coalition's efforts, there is much work to be done.

"Not surprisingly, the majority of business leaders are reserving judgement and looking for tangible changes on the ground," Mr Lambert says.

"We plan to move beyond the drama of the Spending Review and focus on opportunities for growth and investment."

Investment and trade

If an economy normally has four engines that help move it forward, it is clear the UK is now left with just two, the CBI reasons.

David Cameron needs the private sector to deliver economic growth in the UK, the CBI insists

"We know that government consumption will not be driving growth in the coming years," Mr Lambert reasons, and it seems consumer spending cannot be relied on either.

"It seems likely that household budgets will also be squeezed for some time," he adds, pointing to how households are reducing personal debts, as well as how salary growth has slowed while prices keep on rising.

Consequently, Mr Lambert insists, "private sector investment and trade are the two main engines for growth".

Attracting investors

In other words, the coalition now depends on the private sector's success.

"Everybody knows we can't cut our way to growth and prosperity," Mr Lambert points out.

"And without growth, the country will face real economic and political difficulties."

Attracting foreign investors is crucial to ensure the UK prospers, the CBI says

To help the private sector pick up the slack as the public sector is scaled back, the government must ensure the UK, with its flexible labour laws and good industrial relations, remains an attractive place to invest, Mr Lambert insists.

That would involve offering investors a favourable tax regime, predictable and reasonable regulation and business friendly planning laws, he explains.

If it does not, he points out, many companies will channel their investment elsewhere.

It is particularly important to attract investment from non-British multinationals, as large companies headquartered in the UK are increasingly focusing on growing their global footprint rather than investing at home, according to the CBI.

"The attractiveness of the UK as a place to invest may be in long-term decline," Mr Lambert says.

"Over the last 10 years, the [UK's competitive advantages] have gradually been eroded as other countries have become more competitive.

"If nothing changes, looking five years ahead, companies - particularly manufacturers - could look to reduce their UK presence."

Trade wars

Mr Lambert says governments should work together rather than engage in trade wars

Trade, the other engine for economic growth, has been aided by a 20% fall in the value of Sterling in the last couple of years, a fall that has made it easier for UK's exporters to sell their products or services overseas, the CBI observes.

However, this advantage could be eroded amidst signs that some countries are keeping their own currencies artificially low, he suggests.

"This is a concern, and a real concern," acknowledges Mr Lambert.

So far, during a period when the world has gone through a severe recession, there have been few signs of protectionism, he reasons, though now there are "signs that the cohesive and coordinated approach from the G20 now seems to be dissipating", he says.

Closer cooperation between countries is crucial to ensure global growth, insists CBI chief economic advisor Ian McCafferty.

"The multilateral action spirit of two to three years ago, as we went into the recession, needs to be maintained," he says, as he warns against single-issue bilateral agreements that are "missing the point".