Carolyn Fairbairn tells Prospect a no-deal outcome would bring chaos—and more firms will soon start activating their contingency plansby Jemma Slingo / January 12, 2019 / Leave a comment
As the Brexit “meaningful vote” rapidly approaches and “no deal” looks ever more likely, Prospect sat down with the Confederation of British Industry’s Director-General, Carolyn Fairbairn, to talk about the impact Brexit will have on British business. This interview has been edited and condensed.
Prospect: How great a threat do you think Brexit is to business in Britain?
Carolyn Fairbairn: Brexit has been a massive concern for business right from the aftermath of the referendum, although I think firms have been very much in the boat of wanting to get on with it and make a success of it—that has certainly been the CBI position. So there hasn’t been a sense of trying to reverse the result. But I have to say that uncertainty has just grown over the last two and a half years. The real concern now is that we just crash out with no deal. I think there are two major threats to our economy from that. One is the immediate disruption and the other is the longer term loss of competitiveness.
In terms of the short run disruption, I think the biggest things on business minds at the moment are around rationing of ports, so the real challenge around getting parts, supplies, food, medicines in through port capacity which may shrink by as much as 75 per cent. In the services sector there is a real concern about insurers’ contract continuity and the fact there would be tariffs on 90 per cent of our exports. So that’s immediate disruption.
In the longer term, there is a fundamental issue around what happens if you put grit into the system of trade that you have with your closest trading partner. What business really feels is that no deal or, indeed, a Canada-type relationship—which is kind of no deal-lite in many ways, because it would significantly increase border checks and friction—would fundamentally reduce the competitiveness of the UK.
So, the long and short of it, Brexit is a really significant threat. What business really wants to be doing is getting on with the other very major opportunities for the UK which are around being a world leader in tech, addressing manufacturing, addressing our productivity issues, our skills issues. That is the other cost of Brexit. It is sucking the oxygen out of the very strong ambition of British firms to get on with being competitive and productive.
Prospect: Do you see businesses leaving Britain at the moment?
CF: There are certainly firms that can’t really put in contingency plans that mitigate the effect of a hard Brexit without leaving, because their supply chains are so integrated. They almost have binary decisions: they either move their production to Croatia, for example—I know one automotive company that would do that and has plans on the table to do that—or they don’t. And there isn’t really that much in between. So I think undoubtedly we see businesses leaving the country.
Prospect: Let’s cast ourselves forward into an alternate universe and imagine the deal fails in parliament and there is some kind of political collapse. What would the failure of that deal mean for business confidence?
CF:I think it’s potentially quite serious if there were to be a collapse with no obvious way of getting to consensus on an alternative.
Prospect: That looks like quite a tough reach at the moment doesn’t it? I mean there’s no Plan B.
CF: There’s no consensus around a Plan B and I think what business will be looking for is leadership from the political community, to find the best consensus they can to avoid a crash out. I don’t think business is being prescriptive; at least there isn’t a consensus position that the business community has as yet. They are still focused, I think, on the pragmatism of where we are. But their main concern will be to avoid the crash out.
These days and weeks in January are absolutely critical for the business community to observe whether that leadership emerges; whether that consensus emerges. If it doesn’t, I think frankly firms have to go onto the footing of full scale preparation and they will be looking for the government to support them to do that.
Prospect: The timing of that could be particularly appalling. As you’ll probably have read, the yield curve is now inverted and that is often taken as a leading indicator of recession. It certainly predated the 2007/8 collapse. President Trump has enacted an enormous pro-cyclical tax cut and the inflationary effects of that are coming through. It might mean the Federal Reserve moves earlier than it otherwise would have done, which could easily have a “popping” effect. What do you think the likelihood is of a recession next year?
CF:We recently published our economic forecast for next year and the year after, which is based on the fairly benign scenario of a smooth Brexit. What we are seeing is that if we can reach an agreement around a smooth Brexit—and by that we mean primarily the transition period—we should be looking at 1.3 per cent growth next year and 1.4 per cent the year after, which is reasonable. It’s not going to set the world on fire, but in terms of steady growth that we can actually build from we see that as a prize.
We are seeing investment. Major business investment is paused but we are seeing investments going into productivity improvements, technology change, AI, and our robot count is growing. We have got some really bright opportunities here.
Prospect: If we shift towards more high-end manufacturing, British businesses—assuming we leave the EU—will have to be more present in global markets. The character of international politics has changed in the last five years towards a substantially more authoritarian stripe. How do you think businesses should negotiate the change of political character that is taking place around the world?
CF: I would start from a position of optimism around the global market place. There is a growing middle class in countries with huge populations and that’s the kind of market we are very good at serving. They also need our services. We are particularly strong in accountancy, design, architecture and engineering.
I do think there are challenges in the way that business conducts itself and is able to overcome some of those differences in values and the rule of law. China I think is interesting. We have a lot of members who are concerned about intellectual property ownership, but I think you can only solve that by being there. One of the interesting things that we’ve observed is that Germany, for example, has five times the exports to China that the UK does. With a real commitment to China, and with an “eyes wide open” view on how you can protect IP, it is a real opportunity for the UK. We say the same thing about Africa.
Prospect: You mentioned earlier the contract continuity issue, which is particularly relevant to the derivatives market. Do you see a chance of that being solved?
CF: Well obviously if we could head into the transition it is solved. If we end up in a no deal situation I think that it will be an uncomfortable and potentially quite chaotic time where we will need to have a number of very rapid bilateral—and probably quite short term—arrangements around essentials. It’s a deeply unattractive place to be, that kind of last minute scrabbling around for deeply uncertain fragile arrangements. But I think that that would have to be on the list.
Prospect: What’s going to be the effect of diminished immigration on the UK economy and British business?
CF: I think this is a very serious democratic, political and economic question that the UK needs to ask in a proper and grown up way. Again, assuming we leave, we will regain control over our borders. How do we use that? What businesses are saying to us and what we feel very strongly is do not underestimate the shock and change a radical reduction in the number of low skilled people who can come to our country will have on the UK economy. That is a seismic shift and anybody who underestimates that, tries to do it too quickly and doesn’t allow business time to adapt to that, either through investment or additional training in the UK is making a very, very serious mistake.
Prospect: The blunt force argument that has developed on the right is that if you shut off the flow of low skilled immigrants into Britain, then workers will be able to charge more for their labour. Wages will have to go up because workers will be more in demand as there will be fewer of them. What do you say to that?
CF: It’s an utterly flawed argument. There is next to no economic evidence to support the fact that low skilled immigration has depressed wages. It’s a much more complex relationship. We’ve had high productivity businesses that have come to the UK because of our labour markets. The other evidence I think you have to bring to bear to counter that argument is the recognition of time scales. How quickly can firms really adapt to that very significant shock and what will they have to do? They have a number of different options. One is that they compete more for labour. But let’s make no mistake, this is a global competition. I was talking to one of our members the other day who has set up in Poland. They’re struggling to get low skilled labour in Poland too. Point one.
Point two, the investment in productivity saving. We are very supportive of that. We are a relatively low adopter country in terms of new technology. We tend to be a country of ostriches when it comes to new technology rather than magpies picking new ones. But look at the elapsed time it takes to invest in new technology. That is going to be a matter of years, not months. In the meantime, what happens?
I think that that blunt force argument is fallacious and dangerous. We can control immigration, but we have a choice in how we do it. We need to have a robust debate about the need for a transition period in our new migration model because otherwise it would be the most vulnerable that are hurt most, because it will be business investment that falls.
Prospect: How much of the City do you think is going to move out?
CF: The thing that we’ve been watching more than people is the movement of capital, because although you see relatively few people move you see much more in terms of capital. I’m a real optimist about the City’s strengths in that I think they go far deeper than the EU relationship. We have extraordinary infrastructure in terms of systems, in terms of talent, in terms of this is a place where people want to come and live, and I think that is sticky. I don’t see any overnight fall from grace for the City.
But you do have to recognise just how competitive global financial markets are. You have New York, Singapore, Hong Kong, which are probably more competitive than European capitals. I think it’s really worth getting a great financial services deal and actually, if you look at the political declaration, there is an ambition in there for that.
Prospect: Tacking ever leftwards, we arrive at Jeremy Corbyn and John McDonnell. McDonnell famously waved Mao’s Little Red Book at George Osborne and at one Labour Party Conference he declared to the crowd “I am a socialist.” If there were to be a Corbyn government an economic world view would be introduced profoundly different to anything we have seen since the Second World War. Do you see a Corbyn government as a potential threat to British business?
CF: One of the things we want to engage with the Labour Party on is how we can have a partnership solution. Because what you don’t want to do is bring in policies that harm those you are trying to help. And that is what we worry about.
Prospect: You think there is a risk that the Labour Party would do that?
CF: I do, I do. Let’s take the example of the policy announced at the last Labour Party conference, which was a 10 per cent share capital being transferred to employees. We know the impact that would have on foreign direct investment coming into the UK would be dramatic. We are one of the leading countries in the world for foreign direct investment. It drives high productivity jobs and these are some of the highest productivity, best paid jobs in the country, so Labour would be potentially damaging exactly the kind of employment opportunities that it wants to create.
Still, I think Corbyn and McDonnell are asking a lot of the right questions. The sense of unfairness in our society is palpable and demonstrable. We are relatively low in the G20 in terms of social mobility and it’s very hard in the UK if you’re born in tough times and in a tough place to get out of that.
Prospect: What do think the likelihood is of British business having a good relationship with a McDonnell/Corbyn government? McDonnell’s background is one where he grew up working nightshifts in factories, then he was a social worker and then was a foster carer. Will his world view—or that of Corbyn—ever be in sympathy with “bosses” and “business”?
CF: The CBI has been extremely clear and has said that if some of Labour’s policies became facts we would see investors reaching for their coats. And we will continue to call a spade a spade in terms of the impact of its policies. I am very clear, and I will say this publicly, that there are businesses who do see the risk of a Corbyn government being worse than the risk of a hard Brexit.
Given that Labour will has an interest, we hope, in having a successful UK economy, where living standards rise, there is scope for productive engagement. That’s where we are trying to get to.