Hamish McRae: We are heading for a pause and then prosperity

Why, from the point of view of the business community, might a second Labour term differ from the first? Talk to people running businesses and three themes repeatedly come up. The first is the importance of macro-economic stability, achieved in the past four years, for which business people are truly grateful. The second is that they are concerned about the growing burden of regulation. And the third is that the pace of structural change in the economy puts tremendous pressure on them.

Why, from the point of view of the business community, might a second Labour term differ from the first? Talk to people running businesses and three themes repeatedly come up. The first is the importance of macro-economic stability, achieved in the past four years, for which business people are truly grateful. The second is that they are concerned about the growing burden of regulation. And the third is that the pace of structural change in the economy puts tremendous pressure on them.

So what will be different? Businesses can expect reasonable macro-economic stability to continue but the economic cycle has not disappeared. So instead of seeing steady growth, the second half of an eight-year expansion, we are going to see a pause. The duration of pause, its severity and its impact on different parts of the economy are unknowns.

But we can guess. Mine is that there will be two difficult years followed by a longish period of better ones. The difficult years will be 2002 and 2003, not this year, for there is still sufficient momentum in the economy to maintain solid growth for months. Whether there will be actual recession for the whole UK economy depends on the scale of the slowdown in the rest of the world, but there will certainly be parts of the economy (and parts of the country) that will experience what economists convolutedly call "negative growth". Some sectors of manufacturing, hit by the fall in export demand, are probably moving into recession now. The parts of the country that depend on agriculture and tourism are almost certainly in recession.

But a pause is inevitable. Almost every day there is new evidence of the slowdown in the US or continental Europe, and in Japan there is evidence of recession. We may come through the next couple of years quite well in relative terms but it is cold comfort to do relatively well because others are doing badly. At least it is if you are trying to run a business.

But in another four years, the next growth phase should be firmly established, maybe sooner. The trick for companies is to look through the valley and make sure any cutbacks needed to survive the next 18 months enhance longer-term growth prospects, rather than reducing them. The trick for the Government will be to make sure that it does not make any macro-economic mistakes, thereby making an inevitably difficult period worse.

Regulation: will it be more of the same? If so, then business will be extremely concerned.

The greatest quarrel small- and medium-sized businesses have had with the Labour Government has been the rise in regulation. But the concern varies with the size of the company. With one exception, large companies are not too bothered, for they have human relations departments used to coping with the explosion of employment legislation. Of course, this adds costs, but once the computers have been tweaked and the necessary forms completed, the system can cope, at least as far as employment legislation is concerned. The exception is the climate levy on energy use. In theory, this is supposed to be revenue-neutral, but in practice it is a blow against manufacturing.

In service industries, energy is one of many inputs. By fine-tuning building management and investing in new controls it is usually possible to cut energy use even when increasing output. With manufacturing, energy is a core element of the product.

I spent time last week with Royal Worcester, the fine china and porcelain manufacturer. You put china and porcelain in kilns and fire them. So energy is a crucial input and the company has been suffering from the near-50 per cent increase in gas prices over the past year. If it could use less energy it would dearly love to do so. Now it has an additional regulatory burden that will be very difficult to administer.

One simple conundrum is: do you measure output by numbers of items or by weight? All this takes time (and energy going to meetings with the DTI) that could be used more profitably elsewhere.

There is a further twist that I learnt at Mazak, the UK arm of a Japanese machine-tool manufacturer, also in Worcester. Its deputy MD, Dr David Jack, said the usual way you cut energy use is to put in new equipment, because new kit is usually more efficient than old. But new kit also normally uses fewer people to run it. That fits in with one prime government objective: increasing productivity. But the way the climate levy is constructed means that if you invest in new equipment you don't get money back, because a probable side effect of the new investment is cutting the workforce, and that counts against getting a rebate. So two government objectives ­ increasing productivity and cutting energy use ­ are in direct conflict with each other.

For smaller companies the climate levy is less important than labour legislation. Once a company has a couple of hundred employees it has to have a human resources department. But if you have, say, 30, the person doing the employment admin is probably the person who runs everything else. So coping with new regulation is a direct new burden on someone whose time is already pulled in different directions. If this goes on, the business community will turn sharply against Labour, and probably Europe too. I suspect a lot of the rising hostility among business people towards Europe is the result of a feeling that we are allowing Brussels to impose new burdens on business.

And structural change? It is hard to appreciate how fast the economy has changed over the past four years. There has been decent economic growth, but some sectors have not seen any growth, parts of the tourist industry and much of manufacturing for example. One town, where a large employer has closed, is struggling, and a neighbouring town where a new shopping centre has opened is cracking along.

Expect this to continue even more rapidly. If the pace of change is already unsettling to many, expect it to become even more unsettling. There may be nothing much governments can do about these concerns, but they will affect attitudes towards political leadership. During the past four years, Labour has received little of the blame for the pace of change, and rightly so, for it would be unfair to attack it for things beyond its control. In another four years the business community may feel differently, especially if those years are going to be tougher ones.