Yahoo Finance Britain ‘definitely’ entering recession as prices surge
Britain is “definitely” tumbling into recession, the outgoing president of the CBI warned after inflation surged to a new 40-year high amid the worst industrial strife for decades.
Lord Bilimoria said families are “tightening their belts” as the Office for National Statistics (ONS) reported inflation of 9.1pc in May, driven by a significant increase in food costs.
Unions have seized on higher prices to demand larger pay rises for their members, sparking the biggest rail strikes since the 1980s this week. The pound fell by nearly 1pc to as low as $1.2162.
The crunch is spreading across the globe with Jerome Powell, chairman of the US Federal Reserve, admitting that a recession is “a possibility” in the world’s largest economy.
Lord Bilimoria warned that the UK’s recovery has been wiped out by soaring prices and called for urgent tax cuts to redress the balance.
In an interview with The Telegraph, he said: “Demand was very much there, but now consumers are feeling the pinch."
Meanwhile for businesses in industries such as hospitality, “many of their costs have doubled, of certain ingredients. They cannot pass that on, the maximum they can try to put up their prices is say 10pc, but if they are absorbing input costs which are up 30pc, 40pc, 50pc, they are being squeezed.”
Fears are growing that spiralling prices will trigger a global downturn.
Nathan Sheets, global chief economist at Citi, said that the possibility of a worldwide recession is now at 50pc.
In America, Mr Powell is raising interest rates sharply to bring inflation under control. He admitted for the first time on Wednesday that it is becoming "more difficult for us to achieve" a so-called soft landing, where price rises are tamed without a recession.
So far the Fed has raised rates to 1.75pc and the Bank of England to 1.25pc, while the European Central Bank is preparing to take rates from negative territory back to zero in the coming months.
British inflation is being driven in large part by food prices, which are rising at their fastest rate since 2009.
Producer input prices climbed by 22.1pc in the year to May, the highest level since records began in 1985, in a sign that cost pressures on businesses are still rising and consumer inflation is likely to jump even more in coming months.
The consumer prices index rose by 9.1pc in May, while the older retail prices index measure climbed by 11.7pc.
Lord Bilimoria, the founder and chairman of Cobra Beer, called for tax cuts to get businesses and the wider economy through the downturn.
“It may be too late to avoid it, but if we act quickly we can minimise the impact of it hugely,” he said.
He argued that fears tax cuts will stoke inflation are misplaced.
“Helping businesses now will not fuel inflation," he said.
“You need to generate demand, consumers are already beginning to tighten and not spend. You need to encourage spending.”
The reduced rate of VAT for hospitality businesses in the pandemic should be re-introduced, he said, while the jump in the rate of national insurance should be reversed and next year’s hike to corporation tax should be at least reduced from the current plan to raise it from 19pc to 25pc.
In a speech on Wednesday evening, the peer called for a more flexible immigration policy to help ease the skills shortage and so reduce the pressure on pay and prices.
He said: “Short-term, the government should update the shortage occupations list to relieve pressures, and add immediate flexibility to the apprenticeship levy, so firms can use those funds to access the labour and skills they need to succeed,” he will say.
“Longer term, the government should make the Migration Advisory Committee independent, similar to the Low Pay Commission, so the UK’s immigration system can be more responsive to economic needs.”
‘We have got to cut taxes to get out of this downturn’, says CBI president
Tim Wallace
You know times are tough when the president of Britain’s largest business group describes the economy’s prospects with the story of a survivor from a North Vietnamese prison camp.
Lord Karan Bilimoria, who is preparing to step down as head of the Confederation of British Industry (CBI), cites James Stockdale, a US navy pilot shot down in 1965. Stockdale endured seven years as a prisoner of war — and repeated torture.
He survived when many comrades did not. Later analysing the situation, Bilimoria says, Stockdale identified some prisoners were too optimistic and therefore broken by repeated disappointments, while others were too pessimistic and lost the will to go on. Stockdale, however, could balance long-term hope with acceptance of horrors to come in the near future.
Bilimoria argues businesses need to learn from this “realism”.
While “recession is the horror we will face” as the cost of living crisis bites, he says he is “eternally optimistic” the UK is a dynamic and creative economy that can surmount any obstacles. Bilimoria notes that when he moved to Britain from India in the 1980s, his new home was known as “the sick man of Europe”.
Britain certainly will need to bounce back: the country is “definitely” heading into a recession.
“Demand was very much there, but now consumers are feeling the pinch and are tightening their belts,” says Bilimoria, with “inflation in everything they are buying”.
Companies are also being crushed, he says. Bilimoria’s chairmanship of Cobra Beer puts the peer very directly in touch with the hospitality industry in particular.
“We have inflation that is literally rampant. It is much higher than the headline figures of 9pc or 10pc — in my own business we talk to many restaurants. Many of their costs have doubled, of certain ingredients,” he says, over a cappuccino rather than a beer.
“They [companies] cannot pass that on, the maximum they can try to put up their prices is say 10pc, but if they are absorbing input costs which are up 30pc, 40pc, 50pc, they are being squeezed.”
The answer, he argues, must be tax cuts to soften the recession: “It may be too late to avoid it, but if we act quickly we can minimise the impact of it hugely”.
More serious fuel duty cuts would help — the 5p slash so far “is not even a drop in the ocean” — while cash to reduce energy bills should be more targeted.
Bilimoria wants VAT to be cut back again for hospitality, replicating the pandemic measure which reduced the tax from 20pc to 5pc before being fully restored in April.
“We need the VAT reduction now to help us and help consumers — the Government can help more right now,” he says, praising actions “which helped save businesses” in 2020 and 2021.
“The danger of not helping is far worse than the cost of helping,” he says, warning of more “failing businesses and bankrupt individuals” in a deeper recession.
At the very least, Bilimoria wants Rishi Sunak, the Chancellor, to stop making the situation worse.
“To have the highest tax burden in 70 years I think is absolutely wrong,” he argues.
“It is absolutely wrong to put up corporation tax in one swoop from 19pc to 25pc. National insurance is a tax on jobs — to put that up by 2.5pc, which affects both employers and employees with 1.25pc [each], this is the wrong thing to do.
“This is the time we have got to cut taxes to generate investment and generate growth, because that is what is going to get us out of this.”
Many of these are his personal campaigns. The CBI’s main official focus is on a successor to the 130pc investment super deduction which ends in March. The policy gives businesses a 25p cut in their tax bill for every £1 invested on certain types of industrial plant.
The business group, which is in talks with the Government over a permanent replacement scheme, favours a 100pc deduction for capital investment to stimulate spending for the long-term.
Sunak has indicated something will be forthcoming in the autumn Budget, though the lack of urgency frustrates Bilimoria who wishes it had been announced in March’s Spring Statement.
The super deduction “could have been used even more if businesses knew it was going to carry on.”
“Fortune favours the bold,” he exclaims, prodding the table to emphasise the point.
“You have got to be bold in these times. They were bold in the pandemic, in borrowing £400bn and helping save the economy — that has not changed, we have still got to save the economy.”
The pandemic showed the state can be nimble when required and Bilimoria is keen to apply this in any area.
That includes Brexit (a solution to Northern Ireland’s trade woes is “eminently possible” with “the equivalent of a green and red [lane] at customs” for declarations), energy (“small modular nuclear reactors can be set up in four to five years, why are we not starting work on them right away?”) and even humanitarian crises (he convened businesses to send oxygen to Indian hospitals last year, and food to Ukraine following Russia’s invasion).
The peer says Covid re-forged Tory links with the CBI which were “not great through the whole Brexit period”.
His own experience as a parliamentarian, as well as contacts in the world of politics, played a role. He describes him and Michael Gove as long “opponents but also very great friends” since Bilimoria headed the Cambridge Union at the same time as the now Secretary of State for Levelling Up ran its Oxford counterpart.
But the key was dealing with the pandemic, conjuring up emergency policies such as furlough, which came in just before Bilimoria took the role in June 2020.
As a result, he argues CBI has a direct line to Government departments to flag up problems and offer new policies.
The test will come in the autumn, however, when the CBI — under Bilimoria’s successor Brian McBride — will find out if it gets those tax cuts it wants in the next Budget.
