After the longest and deepest recession since 1945, which saw the economy shrink by 6% in under two years, a battered UK finally limped into ‘growth’ territory last week. City economists had expected GDP to expand by 0.4% over the October-December quarter, but the announcement that growth was just 0.1% has underlined again the deep structural obstacles that remain.
Robin Clapp
Brown’s hopes of claiming credit for steering the economy through the minefield of financial meltdown and job losses were dealt an instant blow when the world’s biggest buyer of government bonds warned: “The UK is a must to avoid. Its gilts are resting on a bed of nitroglycerin”.
This was followed by the publication of an officially commissioned report into wealth distribution which revealed that Britain now has the highest level of income inequality since 1948. The richest 10% of the population are more than 100 times as wealthy as the poorest 10%.
Adding further to New Labour woes, the international credit ratings agency Standard and Poor then waded into the debate by downgrading Britain’s banking industry, claiming significantly that: “The weak UK economy will continue to hinder the credit profile of the UK banking industry”.
Even this anaemic recovery has only been made possible by an enormous injection of government support. The budget deficit has been expanded to a post-war record and teetering banks have been nationalised. Interest rates have been slashed to a historically low 0.5% since March 2009 and the Bank of England has purchased £200 billion of government bonds, through ‘quantitative easing’, which in essence means printing cash that banks can then lend to families and firms.
All these schemes, mirrored to one degree or another in the US, Germany, Japan and China have been designed to steer the world economy away from the precipice of depression. Even so, the last three years will enter the textbooks as the ‘Great Recession’, though that description won’t begin to describe the suffering and plunging poverty levels experienced by millions of workers across the planet.
Britain may at last have joined most of the global economy in being jolted temporarily into life, but none of the fundamental factors that led to this synchronised crash have been resolved.
Put simply, the scope for profitable investment in production has not kept pace with the accumulation of capital, leading the capitalists into searching out easier and bigger returns. A big gap exists between the productive capacity of the economy and actual output.
Hence their obsession with exotic financial speculations that promised instant returns for little or no apparent risk, but ultimately led to what the deputy governor of the Bank of England called the largest financial crash of its kind in history.
Blair and Brown were happy to embrace and develop Thatcher’s neoliberal market model, encouraging a largely unregulated banking system. Half of Britain’s growth between 1997 and 2007 came from finance, construction and property. Over the same period, manufacturing shrank from 20% to 12% of national output.
Before the crash, bank assets were equivalent to four times national output – proportionately higher than in any other country except Iceland and Switzerland. Even Tory MP John Redwood observed that Britain is now ‘a large bank with a medium-sized government attached to it’!
Working people have borne the pain in the last two years as jobs have haemorrhaged with high street names like Woolworths, Dolcis, Borders and MFI disappearing. Household debt, relative to income, is still only slightly below its peak, making more likely a prolonged weakness in private spending.
Many workers borrowed heavily against the rising value of their homes before the crash. 28 months on, house prices have plummeted by over 20% and may not rise to their August 2007 peak until the mid-2020s, conjuring up a renewed threat of negative equity.
With a general election due, the leaders of the three main parties, Brown, Cameron and Clegg are fighting over a miserable inheritance. All demand massive cuts to restore the state of public finances. With the budget deficit forecast to equal 12.6% of GDP in 2009-2010, PriceWaterhouseCoopers has said that spending needs to be cut twice as fast over the next four years as implied in the last budget. That would mean cuts of 11% a year across departmental spending. If health is to be ringfenced, the figure rises to 15%.
These threatened attacks on public sector jobs, wages and pensions, combined with the ending of quantitative easing, will exacerbate the already very real risk of a double-dip recession.
The trade-weighted value of the pound has fallen by almost 25% since 2007, which improves the situation for British exporters, but a sustained rise in exports is limited by the weak state of British manufacturing, the fragile world outlook and the fact that other countries too are looking to export aggressively.
The OECD predicts UK growth of 1.2% in 2010, but even if a double dip recession is avoided, any upswing will be muted because consumer spending, which makes up nearly two-thirds of GDP, fell 3% in 2009 and is likely to remain stagnant.
A great period of austerity opens up for workers if the main parties have their way, with household finances squeezed through higher taxes and vicious cuts.
A long, flat bottom of weak growth is the best that capitalism can offer. This is our spur to challenge and replace their diseased system.
