British households facing depression

The UK economy is struggling to recover from the Great Recession of 2008-9.  While profitability has recovered, British big business is still refusing to invest.  In Q1’11, UK gross fixed investment slumped by 4.4% compared with Q4’10, while household consumption fell 0.6%.  Most significant, business investment excluding property fell 7.1%  (manufacturing investment fell 1.1%).  It prefers to heap up the cash, invest abroad or speculate in stock markets rather than invest in expanding production or employment in the UK.   And while that continues British households on average will continue to suffer significant losses in living standards.

Household spending  is set to experience the slowest pick-up of any post-recession period since 1830, according to a survey of economists.  British consumers will spending barely more by 2015 than they were before the financial crisis in 2008.  In the UK’s 18 major recessions since records began in 1830, Bank of England data show consumer spending on average recovered to 12% above its previous peak within seven years.  But forecasts by the UK’s Office for Budget Responsibility put spending in 2015 at just 5.4% above the 2008 peak, making it the slowest recovery of any comparable post-recession period.  After recessions in the early 1980s and 1990s, spending was 20% and 15% higher respectively.

That household spending will be so laboured is not surprising as the average British household faces the biggest drop in income for 30 years.   Average income could fall 3% this year, the steepest drop since 1981 and taking households back to 2004-5 levels.  The Institute for Fiscal Studies said average take-home incomes actually rose during recent recession due to low inflation and higher social benefits.  But IFS analysis suggests the long-term effects of the recession and higher inflation will soon squeeze incomes.  Lower wage increases and the corrosive effect of rising inflation mean that it is “entirely possible” that income this year will return to levels of six years ago.   Even the Bank of England warned that UK households faced a significant cut in their spending power as inflation heads towards a 5% annual rate.

As well as household incomes falling in real terms (after inflation), household wealth is set to take a significant tumble too.  The main form of wealth for the average households is the home they own (less the mortgage debt they owe).  So if home prices fall, most Britons get poorer.   UK home prices took a tumble during the Great Recession but appeared to be recovering from mid-2009.  But the squeeze on real incomes and inability to borrow is producing another downward leg in home prices (except for the richer parts of London, where restored bankers’ bonuses are spent and rich foreigners want to live).  Some forecasters are now expecting UK house prices to be 10% below end-2010 levels by the end of 2012.

All this does not bode well for the coalition government’s national growth targets.  The government has already downgraded its forecast for 2011 to 1.7%.  The OECD reckons that the UK will grow the slowest of all the major capitalist economies this year.  Economic growth is likely to be a lot slower than the government hopes.  It may be a recovery for big business and their profits, but it is increasingly looking like a depression for the average household.

5 thoughts on “British households facing depression

  1. Michael,

    Businesses in majority of the capitalist economies are refraining from investments even though as you mentioned “profitability has recovered”. With that recovery the department I consumption should pick up due to higher profit rates. You did not explain why that is the case. To say that they want to hoard cash or speculate in the stock market is not a reasonable explanation. Why do they prefer to use their profits to:
    – Buy back their own stocks.
    – Continue to engage in mergers and acquisitions even at these lofty prices.
    – Increase executive management’s compensation.
    These businesses are receiving following bailout/subsidies that helps their rate of profit at the expense of the workers:
    – Very low interest rates. (Of course that’s stealing money from ordinary people’s bank accounts.)
    – Massive tax cuts (and tax rebates in some countries).
    – Massive government spending to prop-up demand for their goods and services. Much of the spending ends up in businesses bank accounts.
    – Lower rents due to falling property prices.
    -Lower employee wages and salaries while inflation and productivity is increasing.
    Ok so looking at rate of profit formula we can see that these subsidies have greatly helped capital’s profitability.
    The reason I believe why they refrain from investing is as follows:
    – Capacity utilization is way below 100%. In the US it’s not even 80% last I checked. With merger and acquisitions that only adds to capacity under utilization.
    – Invest in less expensive zones rather than home is more likely if they do decide to expand.
    – Government’s massive interferences have created the so called “unintended consequences” making it very difficult to predict the outlook and a risky environment for investment. Capitalists will be asking:
    Will the government be able to print more money?
    Will the government be able to borrow more money?
    Will the interest rate stay near zero?
    Will those tax cuts survive?
    Will the state become insolvent?
    Also, the consumer impoverishment due to: the fall in their house prices, lower wages, higher inflation, higher taxes and fees, cuts in state budgets, no interest savings, higher credit card interest rates, and a very high unemployment that will likely keep wages at depressed levels. While productivity has been rising wages have been declining which is an anomaly because in ordinary circumstances when productivity rises so do wages.
    If I were a capitalist I would refrain from investing if the outlook is as murky and also more importantly, the uncertainty regarding the aforementioned bail outs and subsidies without which the rate of profit would likely revert back to previous lows. In other words this is not a sustainable situation.
    I do believe in the falling rate of profit theory and that under- consumption is a symptom of it.
    Your thoughts?

    1. Cameron
      Your explanations of why British capitalists are not investing seem are compelling to me. I dont think we disagree. Profitability is up, as you say, but investment in the ‘real economy’ is not following for the reasons you say. The other big factor is the weight of debt (fictititous capital) that has to be reduced before new investment can take place. There will be a long period of ‘delevergaing’ for the main capitlaist economies to achieve. So trend growth and investment will be weak. And as I have argued, we shal have another deep recession before this decade is out in order to ‘cleanse’ capitlaism from the ‘dead capital’ including debt that still remains.

  2. I would have thought debt would be the key to the lack of investment. Given the added problems with bank lending, firms have to pay off their various debts etc. Marx makes the point in vol III about why hoarding features at this stage of the cycle because of the need to have money, or pay off, in order to safeguard against the decline in fictitious values and the lack of credit (supply constricts with low economic activity despite low interest rates).

    Last week’s figures from the US show that profits before tax, inventory valuations and depreciation to be rising but profits after showed that the first quarter fell significantly compared to the fourth quarter. That would point to paying off debt in its many forms. Whatever measure used the final amount left to firms was declining.

    Plus M&As usually spike in periods of recession (see the UNCTAD FDI reports), concentration of fixed capital.

    Compounding the problem is the uncertainty over stagnating consumer demand, workers impoverishment, prices, govt action etc.

    The capacity utilisation argument is an interesting one, my take on it would be that the lack of investment in production is constricting the supply to growing parts of the global economy (ie it is preventing a rise in capacity utilisation) and so in part leading to inflation at an early stage in the business cycle, which itself would mitigate against investment.

    I have touched on some of these themes recently at my blog

    The underlying problems are still there and the policy responses from the IMF and OECD, especially in pushing interest rate rises, will worsen not improve the situation.

  3. Keithy
    Your point about US profits growth beginning to slow is something I want to take up in a new post. But I’ve got a couple of other posts in the pipeline first.

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