Last Friday, the UK’s national statistics office reported the data for economic growth in Q2’2010 (April to June), the first of the G7 nations to do so. Real GDP growth rose 1.1% in Q2 over Q1, or 1.6% compared to the same quarter in 2009.
This was hailed as an indication that British capitalism was now recovering fast. The new Tory chancellor of exchequer (finance minister) George Osborne claimed that the figures justified the coalition government’s plan to slash and burn public spending. Osborne argued that, as the economy was growing faster, the hit to public spending and services would not damage growth,as the defeated Labour leaders had opined. Ironically, the now shadow finance minister for Labour, Alastair Darling, claimed that the Q2 figures showed that New Labour had led British capitalism out of recession successfully!
The problem with both of these claims is that the Q2 growth figures are artificial. According to the data, construction and property building made the biggest contribution to the expansion – indeed construction output rose at its fastest pace in the quarter in 50 years! Hold on, you might say, how is that possible when the housing market in the doldrums? And the latest data show that house prices have started to fall again.
The answer is two-fold. First, the jump in construction was because nearly all building stopped in the winter months of the first quarter of this year due to excessively cold and wet weather. But even more significant, most of the construction that restarted in the spring and was launched for the first time in that quarter was the product of government procurement. It seems that just prior to the election, the Labour government opened the spending taps and local authorities kicked off a huge building programme before the money ran out. Without this artificial burst of production, the UK economy would have grown by just 0.7% in the second quarter over the first quarter. That’s better than nothing, but hardly a cause for a big cheer.
The real problem is that this artificial boost by the public sector is now over. The coalition government is applying a stranglehold on future public spending. The school building programme has already been stopped in its tracks. Further spending cuts to the health service building programme are on their way too.
From hereon, Britain’s capitalist private sector can no longer rely on handouts from the public sector. On the contrary, it is expected to step up to the plate and fill the hole in investment spending that the public sector will be retrenching on. After the worst economic slump in the UK since the Great Depression, when national output slumped by 6.4% from peak to trough, the private sector is now supposed to grow at a 5% a year rate to fill the gap and get British capitalism back to a growth rate of 3%-plus necessary to expand employment.
That’s going to be a tall order. Even though profitability has risen, British capitalism is going to struggle to sell its output of goods and services to British households. That’s because unemployment remains high and the number of full-time employees with some degree of job security is still falling (now at 18.2m workers). The only growth in employment is in part-time and temporary work.
As a result, earnings for those in work (excluding bonuses which, as we know, only apply to the top earners) are rising at just 1.4% a year. This means that on average, workers are taking an annual real pay cut of 2% because inflation in the UK is still rising at 3.4% yoy. And the squeeze on real incomes from higher taxes and lower public spending has hardly begun!
British capitalism is unlikely to boost sales much from selling overseas instead of at home either. In Q1’10, UK exports actually fell 1.4% from the previous quarter.
All in all, as world capitalist growth is now expected to relatively feeble over the next few years, at about 3.5% (and that includes China!), British capitalism will do relatively poorly. Indeed, the IMF reckons that Britain will have the slowest growth of the top seven capitalist nations this year. The unexpectedly higher Q2 figures do nothing to change that forecast.