CBI chief’s warning as economy ‘stumbles’ its way to recovery

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THE British economy is making a “stumbling, stuttering” return to prosperity, the director general of the CBI said yesterday, but he warned the recovery is vulnerable to shocks from Europe and a sharp rise in oil prices.

Speaking to the Building Societies Association annual conference in Manchester, John Cridland dismissed figures from the Office for National Statistics that the UK is in a double-dip recession.

“I don’t believe them,” he said. “It does not tally with what I’m hearing around the country.”

His comments came as the Bank of England decided against injecting more cash into the economy through its quantitative easing programme amid concerns over stubbornly high inflation.

Mr Cridland told delegates that the outlook for the UK economy is “a smidgen brighter” and business activity is gaining “modest momentum”.

He pointed to the CBI’s latest manufacturing survey, which shows that confidence has risen significantly, but he conceded that business sentiment remains the biggest barrier to growth.

Mr Cridland said: “The pieces are in place for economic recovery but confidence is far more valuable and continues to be in short supply as the eurozone wobbles.”

He said that a Greek exit is “the more likely outcome” following the weekend’s inconclusive elections.

Other shocks like a “sudden rise in oil prices could blow us off course again”, he added.

The resurgent political and economic crisis in Europe was the dominant theme at the two-day conference.

Martin Vander Weyer, the financial writer, told a Deloitte-sponsored breakfast event that Greece “needs to come back to life with a dramatically devalued drachma”.

“If it was outside the eurozone, it would be a containable problem. Inside the eurozone it’s completely poisonous,” said the author, who lives in Helmsley, North Yorkshire.

“The euro at some point is destined to be fundamentally restructured to lose some of its delinquent fringe members,” he added. “Otherwise it cannot survive.”

Mr Vander Weyer said the only way forward for Britain is to stick to its course of fiscal discipline with the austerity it brings. “Things will get better in the end,” he said.

Robert Parker, a senior adviser at Credit Suisse and a member of the Swiss bank’s investment committee, echoed the CBI view that the UK economy is making a gradual recovery.

Offering a global perspective, he said America’s economy will grow by 2-2.5 per cent this year while any “hard landing” of China’s upward trajectory will still deliver growth of 5 per cent.

“The big problem is Europe,” he said. “This year, the eurozone economy will probably contract by 0.5 per cent. That figure masks a major divergence between Germany and the rest. The numbers in countries like Spain and Portugal are dire.”

In the UK, he forecast that the Bank of England will keep its base rate at 0.5 per cent for “at least two years”. He said the economy would be in much worse shape without the Bank’s £325bn asset-purchase programme, but argued that its full effects are yet to be felt as lenders continue to deleverage.

“Royal Bank of Scotland reduced its balance sheet by £700bn,” he said. “I see other banks going through this process. That means credit conditions will remain tough.”

He said corporate cash levels remain very healthy and estimated that £3 trillion is sitting on balance sheets worldwide.

Mr Parker added: “Over the medium term, that cash will be applied in higher dividends, share buybacks, mergers and acquisitions and investment.”

He said corporate profitability is holding up, supported by large cap companies with operations outside the UK.

Echoing other commentators, he said UK exporters need to trade more with emerging market economies. Currently 18 per cent of UK exports go to emerging markets, compared to 40 per cent of America’s.

The UK consumer, meanwhile, is likely to be “super-conservative” for the next few years as households repair their own balance sheets, said Mr Parker.

In spite of the wider economic challenges, the mutual movement is enjoying a revival.

Stephen Williams, the Leeds-based head of Deloitte’s building societies practice, told delegates: “This feels like the most positive conference I have been to for a long time.”

The accountancy firm published a report yesterday showing an improvement in capital levels and the quality of liquid assets.

Savings balances across the sector improved by £4bn last year, while gross lending rose 26 per cent to £23.6bn.

Deloitte said activity in early 2012 is up on the same period last year.

Mr Williams said: “Building societies have a proud heritage and many have served their local communities for more than 100 years providing more choice for consumers and offering an alternative to the bank plc model.

“The sector has enjoyed a revival over the past 12 months, but economic and regulatory pressures remain.”

He said mutuals must differentiate themselves in the market, provide a distinctive service and develop customer-friendly products.