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From The Socialist newspaper, 10 November 2005

Harder times ahead?

Jane James looks at the state of Britain’s economy today

Is the economy in recession?

NOT YET but we may be heading for one. Recent headline stories such as the prospect of a three-day week for industry due to energy shortages this winter, a downturn in the retail sector and the high price of oil all point to trouble in the economy. In fact some sectors of the economy such as manufacturing are already in recession and economic conditions in some regions are worse than others.

The Economist recently compared two speeches made by Bank of England governor Mervyn King: “In his first speech after becoming governor … in 2003, Mervyn King dubbed the period since 1992 as the nice – non-inflationary consistently expansionary – decade. In a speech on 11 October, he said it was unlikely that the next ten years would be so pleasant.”

Economic growth has slowed to 1.5% – the lowest since the recession of the early nineties and inflation is rising. The main reasons cited in the press’s financial pages are high oil prices, weak demand in the Euro countries, the slowdown in the housing market and a fall in consumer spending. But there are also other deep underlying problems for the British economy.

There are regional differences within the economy. Areas within Scotland, Wales and the north were actually in recession during the first Labour government according to recent OECD figures and the London economy has slowed sharply since the beginning of 2005 resulting in its slowest growth rate for over two years.

Nevertheless, the economy as a whole could slide into recession especially if problems in the US and world economy escalate.

Aren’t most of these economic problems due to the high price of oil?

ACCORDING TO Gordon Brown – yes. He’s desperate to blame bad economic figures on circumstances in the global market, not on his handling of the economy. It’s true that the price of oil - the highest in real terms for 25 years – is increasing the cost of production and distribution as well as eating into consumers’ spending power.

The rapid increase in oil costs is mainly attributable to world events (the Iraq war, surging demand, falling supply, the US hurricanes and a lack of investment).

However there are underlying problems with Britain’s economy, some dating back many years. The continued shrinking of manufacturing industry, record trade deficits, low productivity, lack of adequate investment and the credit/spending boom are just some.

Why are we spending less?

THE CONSUMER boom was financed by credit. In effect we were encouraged to take out loans and run up credit card debts to buy consumer goods; many homeowners took out large loans based on the inflated value of their homes. Household debts, including mortgages, now total over £1 trillion.

Now house price growth has fallen and consumers worry about their huge debts, many are trying to pay off their debts or save money. The increase in utility bills is yet another reason why people are spending less. Credit really means spending tomorrow’s wages for today’s consumables.

As Marx explained, workers cannot collectively buy everything they produce. Under capitalism a worker only receives part of the wealth they create, the rest being profit for the boss.

This is one of the fundamental contradictions of capitalism. The bosses try to overcome this by ploughing back the surplus into industry but cannot overcome these contradictions.

Saving is on the increase, credit card repayments are up and borrowing down. The ‘savings ratio’ (ie the proportion of your earnings after tax that isn’t spent) has increased from 4.1% at the end of 2004 to 5% now. Inevitably there is always a limit to how much people can borrow before deciding it’s time to try to pay off some of their debts.

Has the slowdown in the housing market come to an end?

THIS YEAR has seen the expected slowdown in the housing market with prices remaining stagnant during 2005. House prices doubled between 1999 and 2004 encouraging homeowners to borrow money which was secured against the increasing value of their property. This fed into extra consumer spending.

However, increased monthly mortgage payments (caused by higher interest rates) and the slowdown in the housing market forced homeowners to reduce their spending. Increasing numbers find it impossible to buy their own home – almost one in four first-time buyers has to borrow money from family or friends to pay for the deposit. An average first-time buyer now needs a deposit of £17,000 (up from £5,000 in 1996).

House-building rates have dropped by more than 50% over last 30 years, so demand will continue to outpace supply which could keep prices higher. Nevertheless, a crash in the housing market is not ruled out as house prices are still overvalued so the housing market may not get away with just a slowdown. Even the recent very small rise in house prices is unlikely to persuade many homeowners to resume their spending habits.

Why are so many shops having sales?

BASICALLY, THAT’S to encourage us to spend more! Consumer spending facilitated by rising house prices has accounted for two-thirds of the economy and has been a major contributing factor to the ten-year upswing in the economy.

Retail growth, having outstripped economic growth in past years, is now coming to an end. A CBI survey shows sales volumes falling at their fastest rate for 22 years - September was the seventh successive month of falling sales. Retail sectors worst hit are those linked to buying homes such as furniture, carpets and white goods.

A Financial Times editorial (21.10.05) said retailers will have to “restructure in response to ….more normal levels of consumption”. So the consumer boom years are over. Shop workers will have to pay the price while the bosses bunker down with their profits till better times.

Stores are already closing, workers being sacked and conditions being attacked. Kingfisher (which includes B&Q) are cutting jobs and closing stores, MFI has given a profit warning and some major retailers like Alders and Allsports have already collapsed.

Morrison’s, who acquired Safeway last year for £3.35 billion, have given five profit warnings in the last 18 months. Although stores will close and workers will lose their jobs Sir Ken Morrison describes the company’s misfortunes as just ‘a learning process’. The bosses may moan about low sales and lower profits but, unlike their workforce, their income and conditions in most cases will not suffer.

Why is inflation rising while the economy is slowing?

RISING INFLATION is usually associated with an overheated economy and not a slowdown in growth. If this continues then the economy could be moving into a period of ‘stagflation’. Inflation is a general rise in prices and the Bank of England’s remit is to keep it at 2%. Inflation has been fairly low for the past period but prices are now certainly going up. Inflation is now overshooting the 2% target, rising from 1.1% last year to 2.5% now.

The level of output is close to capacity which limits supply and can lead to more price increases of goods. Globalisation has tended to keep inflation low with cheap immigrant labour, cheap imports and outsourcing jobs to low-wage economies. A big impact on the British economy has been the so-called ‘China shock’. This refers to the huge demand from China for energy, a factor in the oil price rising and staying high. At the same time cheap imports from China have kept inflation low.

It does cross the bosses’ minds that workers might insist on higher wages as higher-priced goods reduce our real income. However, they comfort themselves with the belief that the unions are weak and emasculated by the anti-trade union laws brought in by Thatcher and continued under Blair. They are even complaining about the increase in the minimum wage by 20p an hour!

Of course if workers’ spending power continues to decline then they will buy less goods and the economy will slow down even further.

Is the manufacturing sector still in bad shape?

YES AND it’s getting worse. If manufacturing industry keeps declining at its current rate it will disappear in Britain by 2029! Manufacturing growth is down 1.7% this year and according to Michael Harrison (The Independent) is in ‘technical recession’. 50,000 more skilled engineering jobs will go this year. Scottish Power have announced that 450 UK jobs will go following the disposal of US electricity company Pacific Corp.

The Office of National Statistics (ONS) showed last month that factory gate prices rose above expectations mostly due to the 17.4% rise in the cost of petroleum products between August and September. So manufacturing industry cannot make up for the slowdown in the retail sector.

Britain’s spare energy capacity is critically low as North Sea Gas and Oil supplies are drying up and there are not enough storage tanks. In fact there are only eleven days of spare gas capacity which could mean power cuts if predictions of a cold winter are true.

Any recovery in manufacturing is highly dependent on exporting to other countries but problems exist within the world economy too. The US economy which has been the motor for world growth has its own problems; their economy is still dependent on consumer debt and is also experiencing over-capacity and declining profitability. Worsening problems for the world’s largest economy could trigger a worldwide recession. That would have a huge impact on Britain’s economy.

Why is productivity so low in Britain?

PRODUCTIVITY MEASURES how much is produced by each worker in relation to how much the capitalist spends on production. Labour is usually more productive if the capitalist invests in modern, efficient machinery. Despite boasts from big business and Labour that Britain’s ‘flexible markets’ (read low wages and worse working conditions) have pushed the economy above its rivals, the GDP per capita of the UK is not much better than the other OECD countries.

The OECD has pointed to low productivity in Britain as a key reason for the downturn in the economy which grew at its slowest rate for 14 years in the second quarter of 2005. The main problems are the lack of investment in transport infrastructure, insufficient skilled workers and not investing enough on research and developing new products.

Big business has accrued profits by cutting labour costs and not investing, now the chickens are coming home to roost. So, as Blair and Brown lecture Europe on the benefits of more flexible labour markets they cannot boast about improvements in UK productivity.

However, capitalism will continue to force countries with high productivity to cut costs in order to compete in the global market.

What difference do interest rates make to the economy?

MERVYN KING, Governor of the Bank of England, recently announced that: “The business cycle has not been abolished, although monetary policy can affect its amplitude.” To try to counteract the slowdown in the housing market and worried about signs of economic slowdown in general, the Bank of England cut interest rates in August for the first time for two years - they have remained at 4.5% for the past few months. This followed five interest rate rises between November 2003 and August 2004.

The capitalists wanted to cool the housing boom but they are divided on whether interest rates should go up or down. Interest rate cuts would make borrowing cheaper and could encourage consumers to spend more as well as helping manufacturing industry and boosting Brown’s public purse, which has been emptying out. The British Chamber of Commerce wants another cut, describing manufacturing conditions as ‘disturbing and alarming.’

However, rising inflation makes borrowing and investment for businesses and consumers more unpredictable which impacts on production and spending. This could persuade the Bank of England to increase interest rates. Either way they cannot fundamentally affect the underlying problems of the economy.

Will Brown get out in time?

THIS REFERS to Brown’s joke about past chancellors – …‘those who fail and those who get out in time’ but Brown’s problem is that the job at No.10 has not yet become vacant. After years of boasting that the British economy had been unshackled from boom and bust cycles and defying the problems hitting other economies, the economic facts prove otherwise.

Brown now admits that growth is slower than the 3% to 3.5% predicted in the budget. GDP (gross domestic product) growth in 2005 will be just 1.6%. The OECD has confirmed a £10 billion hole in the public finances and chastises Brown for not building up a surplus when government income was healthier. This would only have been possible by Brown cutting back public spending.

The Office for National Statistics (ONS) recently showed that Brown fiddled the figures to make the public finances appear healthier. In order to reduce government debt figures it was decided that, when private companies borrow money under the private finance initiative (PFI), this is not government debt. This accounts for £24 billion.

Then again Network Rail’s bailout wasn’t included in government spending by classifying Network Rail as a private company. Moving Family Credit from the benefit system to taxation also reduced government expenditure as it became a ‘negative tax’, not a state payment as previously.

Brown also invented new rules which limited borrowing over the whole ‘economic cycle’. When borrowing reached his limits he simply moved the goalposts by shifting the start date of the latest economic cycle by two years. During the first half of 2005/06 public-sector net borrowing rose to £22.9 billion.

The OECD, IMF and European commission all question Brown’s arithmetic and some claim that Brown distorted the figures to avoid tax rises before the election. Brown’s only options are to increase borrowing, raise taxes or cut spending or a combination of them all. The OECD advises Brown that to close the gap there must be less spending on the NHS.

Stephen Lewis of Monument Securities cruelly reflects that: “In retrospect, the Brown ‘economic miracle’ is likely to appear to have been little more than a housing bubble”.

How are the bosses coping in these sparse times?

MOST OF course cope very well as they cut labour costs rather than reduce their profits.

Roche, the Swiss pharmaceutical company, are profiting from increased rates of cancer and the bird flu threat as they predict that the full year sales of tamiflu should reach Sfr1-2 billion.

Bosses here are furious about the recent pensions deal as they are demanding to pay less in taxes. Ruth Lea of the Thatcherite Centre for Policy Studies argues that business taxes are too high and there is too much business legislation especially “since the floodgates opened on spending in 2000.”

Yet, privatised gas and electricity providers chastise the government for not spending enough public money on building new storage plants.

Some companies don’t need lower taxes - they barely pay any! Take British American Tobacco, a UK-listed cigarette company who made £9 billion profit in the last five years and at the same time paid only £13 million in Corporation Tax. That’s a tax rate of less than 2%!

Digby Jones of the CBI complains of unfair competition compared to France and Germany where there are price caps on fuel. Bankers and traders look forward to big bonuses this Christmas - some at Goldmans Sachs will get bonuses of £5 or £10 million - the average for the City is $420,000.

What about the workers?

ORDINARY WORKING-class people always end up paying the largest price when the economy slows down. BAA employees have just been told that 700 airport jobs will have to go, even though profits for the first half of this year are £366 million.

The very mechanisms within capitalism create never-ending booms and slumps. The capitalist economy cannot provide jobs and decent conditions for everyone in a period of upswing but it reveals all its contradictions and inadequacies when the economy slows.

The production of food, energy, medicine and other goods cannot be left in the hands of those that produce for profit and not the needs of humanity. A socialist economy would democratically plan the production and distribution of goods and services to meet the needs of all without destroying our environment.

Those who create the massive wealth in the economy, the working class, will need to struggle against the bosses and this government to defend and improve their conditions and fight for a socialist society.

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In The Socialist 10 November 2005:

Build a new workers' party

Blair staggers on... but 'PFI' Brown is no alternative

United Nations: 60 Years of Failure

Harder times ahead?

Successful student walkouts across the country

Eleven days of rioting across France

Right wing Interior Minister Sarkozy insults youth on estates

Union delegation sees effects of Uribe’s education cuts

Reinstate Andy Beadle

Stop public service jobs massacre

Defend trade union rights


 

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