FIGURES published by the Office for National Statistics this week showed that over the last quarter manufacturing output shrank by 0.9 per cent, returning the total back to the level we saw in the same quarter two years ago. This is despite a substantial devaluation of sterling against the currencies of our major trading partners.
Perhaps more worrying is the CBI survey of members that showed a significant worsening of sentiment with regard to both export and domestic orders over the short term.
I am not deriding the performance of our manufacturing industry. Current conditions are extremely challenging. What I am challenging is the notion that we can grow ourselves out of this problem and at the same time “rebalance” the economy away from financial services. The Bank of England still seems wedded to this idea.
More and more regulation, ever-higher capital requirements, continued negative political rhetoric on pay and bonuses and still the possibility of some form of extra taxation are headwinds the industry can do without. The substantial extra costs in meeting new regulatory requirements, the need to shrink the business or seek hard-to-get new capital and being the punch bag for the nation is clearly sapping morale, leading to a mentality of preservation rather than growth and innovation.
This would not matter if financial services were a small part of the economy but they are one of the largest contributors to the exchequer, accounting for just over 12 per cent of the total.
The sector also has its own problems, with business contracting sharply and redundancies rising daily. Over 100,000 jobs have gone since the Lehman collapse and, according to the CBI, a further 20,000 will have gone by the end of this financial year.
Now is the time to stop denigrating financial services and to get behind it, for it is just as important as our manufacturing industry. The Prime Minister has defended the interests of the City, but we need action now to remove some of the unnecessary burdens, existing and prospective, that are dragging the performance lower at huge cost to the broader economy.
I hope that the recent moves by the business secretary on pay and bonuses will draw a line under this issue. When it comes to remuneration we need to be wary of any measures that could restrict the flexibility of management to structure basic and bonus pay that suits their business model.
In difficult times, beating targets on restructuring and returning a business to a viable entity should be equally rewarded as when times are good. This will mean shedding jobs, closing offices or plants and the many other difficult decisions that have to be made. At the end the business may be smaller and the share price lower but if it places the business in a better position to survive and grow then any bonus should not be seen as a reward for failure.
If the shareholders decide that bonuses should be paid for success then that is a matter for them and not others to decide what that success is and what is appropriate.
Having said that, showing restraint in these difficult times has to be good for business: it shows to staff and others that management is acting responsibly and taking a longer-term view in the interests of all.
Stuart Fraser is policy chairman of the City of London Corporation.