British capitalism seems to be on a roll. A million job vacancies were advertised in July, a new monthly record. Early signs are that unwinding the furlough scheme, now under way, is not going to cause a sharp rise in unemployment.
House prices are rising at the fastest rate since 2004. Public borrowing in July halved compared with last July. Many new companies are being created. Business confidence is rising. The recovery is moving so fast as threats of lockdown recede that the UK on average will get back to pre-pandemic levels of output before the year is out. The chancellor, Rishi Sunak, can indulge his boss’s tantrums; his political position could hardly be stronger.
Sceptics, pretty much everyone, including me, have been confounded. In fairness, nobody foresaw, or could foresee, the incredible development of effective vaccines and the rapid speed of rollout. Also, more than 7 million people have cascaded out of furlough, using it as it was intended, protecting the economy from what would have been devastation, but returning people to paid work as fast as possible. In the main, employers and employees respected the rules of the game over furlough and lockdown rules. The expectations, largely on the right, that nothing the state does at scale can work and that the Brits, as freedom-loving libertarians, believe rules are there to be broken proved unfounded.
Bids for UK companies from private equity firms since start of Covid crisis
The US private equity group Clayton, Dubilier & Rice’s unsolicited – and swiftly rejected – takeover approach for the supermarket chain Morrisons is the latest in a flurry of bids for UK firms from private equity firms since the start of the pandemic.
The billionaire brothers Mohsin and Zuber Issa acquired a majority stake in the supermarket chain with TDR Capital, in a £6.8bn leveraged buyout.
The FTSE 250 pharmaceutical industry services group agreed a £2.6bn takeover offer from Clayton, Dubilier & Rice in May.
The life insurer originally known as Liverpool Victoria agreed to sell itself to Bain Capital in a £530m deal.
In May, KKR agreed to buy the UK infrastructure investor in a deal valued at about £2bn.
The property investment and development group has agreed to be taken over by Blackstone in a £1.2bn deal.
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The retirement homes specialist accepted a takeover offer worth about £650m from Lone Star in 2020.
CD&R completed the £308m acquisition of the plumbing and heating firm in February.
The roadside assistance group agreed to a £219m takeover offer from TowerBrook and Warburg Pincus, who also agreed to invest £380m into its large debt pile.
The power equipment provider accepted a £2.3bn takeover bid from I Squared Capital and TDR Capital in March.
The British pharmaceutical company focused on inhaled medicines had agreed a £958m takeover by the global investment firm the Carlyle Group in May … before the tobacco group Philip Morris International launched a counterbid.
Even Butlins has been caught up in the private equity frenzy, with Blackstone acquiring its owner, Bourne Leisure, earlier this year.
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However, beware. British capitalism has not changed its spots. The open questions are whether the government has learned from this success, understands the nature of the recovery and has a well-designed, flexible strategy to navigate the economy through a near perfect storm of challenges. On the evidence so far, the answers are that it hasn’t and it doesn’t – and is instead given to wishful thinking.
First, a vaccine-induced snap back to an economic structure that was malfunctioning beforehand has to be understood as just that. London and the south-east have led the bounce, driven by big spending on construction and leisure, which are also the areas in which most startups are forming, from nail bars to food delivery companies, rather than tech, innovation and export. Moreover, the rest of the country is lagging far behind. Investigations by the National Institute for Economic and Social Research (NIESR) show that the north-east, for example, will not get back to pre-pandemic levels of output until 2024.
Worse, for all the vigour of the snap back, no part of the UK, says the NIESR, is returning to the growth trends before the pandemic struck, trends that were already weak. We are in an economic trap of low growth, low skills, high regional inequality and low trade – Brexit has hammered trade volumes with Europe and stifled our service sector exporters.
The double trouble in terms of policy is that Sunak and the Treasury look at the economy almost wholly in financial terms. Their preoccupation, as behoves what is in essence a ministry of finance, is borrowing and debt. Both matter, of course, but as important is the economic behaviour they drive. Britain needed big borrowing over the pandemic; it will need continued big borrowing to reshape and stimulate the economy.
Britain requires an economic and business ministry of equal standing to the Treasury to mastermind the country through its recovery. Instead, it has a business secretary, Kwasi Kwarteng, who has regressed, notwithstanding what some of his officials advise, to advocating a rejuvenated “free market” approach, oblivious to the structural weaknesses that the “free market” has created. What’s more, he and the chancellor collude in the fiction that Brexit presents opportunities that trump its obvious costs. Truth-denial, in economics as in defence and security, makes good policy impossible.
Kwarteng and the chancellor collude in the fiction that Brexit presents opportunities that trump its obvious costs
Mandatory reading in this context is the UK’s decisive decade report, the UK Economy 2030 project launched jointly by the LSE’s Centre for Economic Performance and the Resolution Foundation. Britain has to invest hugely and cleverly this decade to level up and achieve net zero, it argues, but it has the ball and chain around its economy of Brexit and low productivity.
Yes, there are assets – our universities, our science base and our language – but the scale of what lies ahead, along with the paltriness of current economic institutions and thinking is incredible. So, for example, one of the signs of a dynamic economy is people moving from jobs with few prospects to those with better prospects, but the rate of job movement in the 2010s was the lowest since the 1930s. As for handling change, Kwarteng should note the report’s evidence that the Thatcherite 1980s were, in terms of managing wholesale change, an economic debacle that have left long-lasting scars. And even if he has a rethink, it is not clear, declare the authors, that the hollowed-out UK state at national and sub-national level has the capacity to act as it needs to after a decade of austerity.
To cap it all, there is private equity’s unprecedented raid on Britain, taking over companies as disparate as the food retailer Morrisons and top defence contractors in record numbers, saddling them with debt while offering worthless assurances that they mean nothing but good. Britain confronts grand challenges not only with a hollowed-out state but a hollowed-out private sector.
But for all this, there is opportunity. Nobody beyond the over-60s in Tory constituency associations and a few swivel-eyed members of rightwing thinktanks believes all these issues can be handled by the private sector and market alone. Even the Competition and Markets Authority has powerful doubts, calling for a proper investigation into whether the British hi-tech jewel Arm should be transferred from one careless owner, SoftBank (which should never have been allowed to buy it in the first place), to another even more careless and rapacious, Nvidia.
We need more of this thinking and action – much more. There are strengths on which to build, but it means putting business before finance, prioritising real economic needs before overheated worries over public debt, thinking honestly about addressing the obvious costs of Brexit and committing genuinely to levelling up and achieving net zero. There are politicians, business leaders, officials and thinkers who get all this. We just need to have them in power – not sidelined by the delusional.
Will Hutton is an Observer columnist