Harder times ahead?

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.