The treasury and the Bank of England base much of their optimism about the outlook for the UK economy on the notion that eventually business investment will revive, picking up the baton of economic growth from where the now exhausted and debt-burdened British consumer leaves off. One reason for supposing it might not is the way the developing world, and particularly China, has begun to gobble up so much more of the world's available pool of business investment than it used to.
According to figures released yesterday, fixed-asset investment in China was up nearly a third in the first half, taking into account both public and private investment. Even for a country as hell bent on development as China, this is plainly unsustainable and, in the medium term at least, the Chinese economy looks like an accident waiting to happen. All the same, for the time being, China remains a formidable drain on investment that might otherwise be taking place in Britain and elsewhere.
Care should be taken not be exaggerate the effect. Despite the size of the country, investment in China is still a comparatively small part of the world total. But by creating yet more industrial capacity in a world already awash with the stuff, it none the less adds to deflationary pressures and thereby limits investment elsewhere. And it is one of the reasons why a report published yesterday by the Institute for Public Policy Research (IPPR) has such a depressingly resigned view of the outlook for British manufacturing industry, suggesting as it does that manufacturing might shrink to as little as 10 per cent of GDP and 5 per cent of employment by 2050. Interestingly for a left-leaning think-tank, the IPPR thinks there is little the Government can or should do about this phenomenon, which it thinks is both global and inevitable.
Nor does it really matter in the round that manufacturing shrinks further so long as the economy as a whole continues to grow. Long gone are the days when making things was the bedrock of all economic success. As we spend less of our money on production, both of food and goods, there will be more money to spend on services, entertainment and the like, which is where most of our growth will come from in future.
None the less, it would be wrong to abandon manufacturing entirely to its fate. There are key strategic and social reasons for maintaining at least some kind of a multi-layered manufacturing base. Societies that forget how to make and grow things will eventually lose touch with the very basics of human existence. There has always been a big and vibrant market in individually customised products, but it has tended to be confined to the relatively wealthy. Technology is likely to transform it into a mass market phenomenon, but to work local production is essential. That's why it is so important that Britain continues to maintain a modern skills base in manufacturing.
A little bit of honour and decency seems at last to be returning to the boardroom, and it has taken a Frenchman to lead the way. Pierre Bilger, the disgraced former chairman and chief executive of Alstom, has decided to return the whole of the €4.1m package of golden goodbyes he received when he stepped down from the French based engineering concern last March, saying that he doesn't want to be "the object of scandal" for the 100,000 Alstom employees it had been his "honour to lead".
Admittedly it has taken some months for M. Bilger to reach this conclusion, during which the humdinger of a row that initially greeted news of the pay-off refused to subside. M. Bilger oversaw some big successes in the company's development, including a stock market flotation in 1998. But disaster struck with the ill-fated acquisition of ABB's energy business soon after, culminating ultimately in the heavily indebted group having to seek state backing for a €2.8bn rescue. M. Bilger bears a large part of the responsibility for this corporate road crash.
Few, if any other executives caught up in the value destruction of the last three years, seem prepared to acknowledge the connection. From John Mayo and Lord Simpson at Marconi to Ian Harley at Abbey National, Adam Singer at Telewest and Barclay Knapp at NTL, the approach has been to pocket the money, paid as a contractual right, and brass neck out the subsequent row, knowing that in a few years time the scandalous size of these rewards for failure will be largely forgotten.
Greed has prevailed over decency, which dictates that the captain should go down with his ship. Rowing off in the one remaining lifeboat, complete with the ship's silver, while the shareholders sink beneath the waves, is not the way the system is meant to work. Indeed there is some substance in the argument that golden parachute contracts only served to encourage a culture of executive recklessness which led many to take wild gambles with their shareholder's money knowing that any personal loss would be limited by their contractual employment rights.
M. Bilger has given back his money for reasons of honour, but what the Americans call the problem of moral hazard demands that the safety net should be removed altogether. Executives who perform poorly should suffer along with their financial backers.
Office boy rally?
There has been something of an office boys' rally in the stock market while I've been off on holiday. I don't want to spoil the party, but I would strongly suggest that the underlings who tend to man the trading desks at this time of year take a reality check. Much of the bounce in equities that has occurred since the outbreak of the war in Iraq is justified on the grounds that equities had become ridiculously oversold as the war drew to a close. On the other hand, it's hard to see what underpins this latest surge in demand.
Some of the uncertainty of the war has now been removed but nobody could claim that the outcome is at all satisfactory, or that the world is a noticeably safer place. The two main protagonists, America and Britain, are facing a more protracted and costly military engagement in Iraq than either of them anticipated. They are also still struggling to disprove the allegation that they went to war under false pretenses.
Both these things are more significant in economic terms than they might seem. All money spent on security, especially in far off places, is essentially unproductive if not positively destructive in its effect. The condemnation of the international community is meanwhile bad for trade, which is ultimately the biggest driver of world economic growth.
The bull case for equities is based on the assumption that regardless of these factors, fiscal and monetary conditions have been sufficiently eased in America and Britain to allow a return to trend rates of growth. Don't bank on it. Some of the geopolitical barriers to renewed business investment may have been removed, but the post bubble restraints of heavy indebtedness and high levels of overcapacity across most industries remain severe. Corporate profits seem to be on the mend, but that's from a low base and in any case is down largely to cost cutting rather than a revival in robust top line growth.
Many of the business leaders I speak to continue to talk of some of the most difficult and challenging trading conditions they have ever experienced. This is not the stuff of a renewed stock market boom. Nor too is the flurry of trading from private investors that seems to have fed the rally of the past few weeks, many of them chasing the same telecom and technology stocks they lost their shirts on last time around - Colt, Psion, Cable & Wireless, and so on. The survivors in these industries are on a much better footing than they were, but expectations are again beginning to run ahead of the reality of continued overcapacity and intense price competition.Reuse content