British economy

When will the bubbles burst?

A NEW document from the Socialist Party executive committee, outlining developments in Britain, is being debated at the Socialist Party's national congress in February. This article is an extract dealing with current economic trends.

"INEVITABLY, A deep-seated elemental class anger is building against the elite at the top of society. Relentless attacks on public services, combined with the increasing struggle to make ends meet will, at a certain stage, result in explosive struggles.

This is likely to be the case even if the economic situation remains the same as it is now for another two or three years. However, this is not the most likely scenario. Britain's economy is fuelled by a vast consumer debt of £212.2 billion, largely kept afloat by the bubble in the housing market and a current account deficit of 2.2% of GDP.

The stock markets are at a six-year high and are also a major bubble in the British economy, largely fuelled by an orgy of takeovers. This, however, will not last indefinitely, and could come to an end in the very short term.

The British economy's underlying weakness is fundamentally responsible for its vulnerability. Manufacturing remains central to an economy's underlying strength. The economies of all the advanced capitalist countries are being 'hollowed out' [of manufacturing], but Britain is leading the way.

The number of workers employed in manufacturing has fallen by a quarter since New Labour came to power. Now just over three million workers are employed in manufacturing, the lowest level since 1841.

By 1900, manufacturing accounted for 28% of economic output and supplied a quarter of the working population. A century later, manufacturing's share of employment has fallen to 14%.

It is true that the value of manufacturing output has risen by more than 18% in real terms since 1978, and by almost 90% since the employment peak in 1957. However, the huge growth in global output means that, in comparison to other countries, Britain is a manufacturing minnow.

As a result, the balance of trade in goods deficit with the rest of the European Union is the highest ever recorded. While manufacturing is a relatively small part of the British economy - which, ironically, allowed it to escape recession in 2001 - recession in manufacturing hits the economy as a whole.

Sliding dollar

A slide in the dollar will undoubtedly negatively affect all British exports - and would result particularly in the further ravaging of manufacturing. This would be a reversal of the relatively favourable situation New Labour inherited as a result of the devaluation of sterling following its crashing out of the exchange rate mechanism in 1992.

Even the industry that exists is increasingly owned by foreign companies. Not only manufacturing companies but the Heathrow and Gatwick operator BAA, Gallaher (the makers of Silk Cut), Associated British Ports, the industrial gas group, BOC, and Scottish Power were bought up by foreign firms in 2006.

New Labour, like the Tories before, takes neo-liberalism to extremes, taking pride in allowing market forces virtually a completely free rein in taking over British companies, and never intervening in defence of the 'national interest' in the way that many governments did in the past.

Wilson's Labour government stepped in to nationalise Rover rather than see it collapse and the Tories did the same with Rolls-Royce. The British ruling class today is incredibly short-sighted and will suffer the consequences - when the underlying weakness of British capitalism is fully revealed.

Even the City of London's status as an international finance centre disguises the fact that it is dominated by the American banks. As the frenzy of gambling on the stock markets intensifies, so does the danger of a catastrophic collapse of a major bank or hedge fund along the lines of the 1998 Long Term Capital Management collapse.

London is at least as vulnerable as other international centres. The Financial Services Authority, recognising that investment banks based in London are not prepared for a recession, 'considerably relaxed the criteria' on which it decides if a hedge fund represents a good investment.

However, such is the inter-connectedness of the world economy that such a collapse, taking place anywhere but particularly in the US, if (as is likely) it triggered a world financial crisis, would mean crisis in London. Given the dominance of the City in the British economy, that would almost certainly trigger a recession."