CBI boss Richard Lambert can see early signs of economic recovery

THE worst is over for the British economy. At least, that was the message from Richard Lambert, the Confederation of Business Industry&rsquo;s (CBI) thoughtful director-general, when we meet. &ldquo;We have finally hit the deck,&rdquo; he tells me, leaning forward. &ldquo;Things are a lot better now than in the first quarter of this year. Where we are now is better than most people would have predicted at the start of this year.&rdquo;<br /><br />Lambert, a silver-haired 65 year old, is sitting at a conference table in his large functional office on the 2nd floor of the employers&rsquo; lobby group headquarters at Centre Point in the West End &ndash; and he soon begins to warm to his theme.<br /><br />He continues: &ldquo;The unemployment rate has grown by two per cent, but the economy has fallen by six per cent since the recession began in the second quarter of last year. And that is remarkable. It shows that employers and employees are both taking a sensible view. Employees are willing to take pay cuts and pay freezes to stay in work. And employers are deciding to hang onto the skill base in their workforce.&rdquo;<br /><br />Lambert, a former Financial Times editor and Monetary Policy Committee member who took up his current post three years ago, adds: &ldquo;Business confidence is beginning to turn. There is a slight upward tick in the earnings expectations of firms. The full impact of the Bank of England&rsquo;s &pound;200bn quantitative easing programme and 0.5 per cent interest rates still have to fully work through the economy. The International Monetary Fund IMF is now saying the world will grow by three per cent, back in March they were saying it would only grow by 1.75 per cent.&rdquo;<br /><br />Lambert is speaking ahead of the CBI&rsquo;s annual conference on Monday at the Park Lane Hilton, where IMF managing director Dominique Strauss-Khan, Marks &amp; Spencer executive chairman Sir Stuart Rose, Financial Services Authority (FSA) chairman Lord Turner and the leaders of all three main parties will debate the way ahead for the world economy.<br /><br />The UK is set to start 2010 behind other major economies after its quarterly GDP figures in October showed &ndash; to most observers&rsquo; surprise &ndash; that the British economy shrank 0.4 per cent between July and September. <br /><br />So while countries such as France, Germany and the US pulled out of recession as long as six months ago, this leaves the UK and Spain as the only western major economies still in a slump (at least if the third quarter figures are not eventually revised by the Office for National Statistics). Most commentators say renewed growth is just around the corner, however.<br /><br />Lambert agrees, but thinks there will be little cause for celebration in 2010. He says: &ldquo;We should be in positive territory by the first half of next year. But there won&rsquo;t be dancing in the streets. People will still be worried about their jobs and money will still be tight. There will be a significant period of bumping along the bottom.&rdquo;<br /><br />Once the economy begins to grow next year, one of the key tasks facing whichever party is in power next year is cutting the spiralling national debt and out of control budget deficit, which is set to be much higher than the forecast &pound;175bn.<br /><br />In the Queen&rsquo;s Speech this week the government proposed a Fiscal Responsibility Bill, which commits it to halving the budget deficit in four years.<br /><br />However, the CBI wants Prime Minister Gordon Brown to go further and faster. Lambert says the government can make an additional &pound;120bn of savings by 2015-16, through a range of measures including freezing the overall public sector wage bill for two years, greater private sector outsourcing, cutting waste and boosting public sector productivity.<br /><br />He says: &ldquo;I realise this kind of stuff is easy to say and very hard to do, but the government needs to be tougher.&rdquo;<br /><br />Lambert adds: &ldquo;The cuts should come on the spending side rather than through taxation. Though I am sure tax rises will come as part of the package. And the cuts should fall on current spending and not capital spending. Cuts on capital spending came in the 1990s, and that was a mistake, which hit the country&rsquo;s growth.&rdquo;<br /><br />However, Lambert adds that in &ldquo;these sweaty political times&rdquo; both Labour and the Conservatives understand that difficult choices have to be made next year after the general election, which must come by June at the latest.<br /><br />He says: &ldquo;I don&rsquo;t think the differences between them are all that great. They both know the situation is serious and needs radical action. The Tory cuts may be a bit more aggressive, but there is not an awful lot between them. Whoever wins is likely to have a budget before the summer.&rdquo;<br /><br />Lambert also believes next year will be a critical period for Lord Turner at the FSA, who he backs, despite criticising him in September for questioning the &ldquo;social usefulness&rdquo; of bankers.<br /><br />He says: &ldquo;The next 15 to 18 months will be critical. The FSA and its international peers have got to establish a fresh global banking regulatory framework. And I have confidence in the FSA.&rdquo; And he adds that the City watchdog must be given the time and space in which to work. <br /><br />He adds: &ldquo;I am not sure about the Tories&rsquo; plans to scrap the FSA. Over the next 18 months the FSA has got a big job to do and need to be taken seriously by other world bodies if the UK is to have its input into these new global regulations. If the Tories are at home are saying &lsquo;we don&rsquo;t take you seriously,&rsquo; I don&rsquo;t think that helps.&rdquo;<br /><br />Banks are obviously key lenders to Lambert&rsquo;s members, and he wants to see financial institutions repair their balance sheets, so that businesses can begin to invest again. He says: &ldquo;Banks are rebuilding their capital bases, and in doing so must hold more capital against their loan books. Although this will take a while, it must happen at as fast a pace as possible.&rdquo;<br /><br />He hopes the break up of parts of the Royal Bank of Scotland and Lloyds Banking Group, both of which have received billions in state aid, will spur an improved marketplace.<br /><br />Lambert says: &ldquo;We need more competition in the banking system. I hope these disposals will bring new entrants into the market. The more there are the better. I hope we will see the entry of non-banking lenders also, the Prudential have talked about getting into this market.&rdquo;<br /><br />Last month, the Centre for Economics and Business Research said City bank bonuses would hit &pound;6bn this year, up from &pound;4bn in 2008, because of rising profits and less competition. <br /><br />Lambert says: &ldquo;There is an understandable public outrage that banks who either explicitly or implicitly were supported by the taxpayer underwriting the global finance system are already beginning to pay themselves big bonuses.&rdquo; <br /><br />He says bank remuneration committees have an important role to play here to make sure their banks are in a healthy position before they look at rewarding staff. Lambert says banks should generally comply with G20 and FSA rules, though he stops short of saying individual bonuses should be stopped if deemed risky.<br /><br />He says: &ldquo;Banks have to get their capital bases right before they think about paying bonuses. They should also give profits back to shareholders in the form of dividends before paying bonuses.&rdquo;<br /><br />And with that, the ever courteous Lambert has to make another meeting. Everybody hopes that he is right and the UK economy has &ldquo;finally hit the deck&rdquo;. UKplc is certainly watching to see how well it is able to bounce next year.<br /><br /><strong>CV </strong> RICHARD LAMBERT<br /><br /><strong>Age:</strong> 65<br /><br /><strong>Work: </strong>Lambert joined the CBI in July 2006; was the only non-economist on the Bank of England&rsquo;s MPC from 2003 to 2006; joined the Financial Times in 1966 as a companies reporter, rising to become editor in 1991.He remained in that post for 10 years during which time he launched editions in New York, Tokyo and Paris. The paper also moved online and doubled its circulation during his tenure <br /><br /><strong>Education:</strong> Balliol College, Oxford. He spent a semester at the Kennedy School of government at Harvard in 2002<br /><br /><strong>Family:</strong> Married with two children<br /><br /><strong>Hobbies: </strong>Theatre and art <br />