The weakest recovery since 1918

The news that UK unemployment was sharply on the rise last month was followed quickly by an estimate by the UK’s National Institute of Economic and Social Research ( Britain’s GDP probably rose only 0.5% in the last three months to September.  The NIESR reckons that year-on-year real growth has been only 0.5% too.  As a result, the level of real GDP is still 4% below its peak back in early 2008.

If that’s right, then the recovery in the British economy since it bottomed in mid-2009 has been the weakest since 1918 after the end of the First World War.  The recovery is even weaker than in the first period of the Great Depression during 1930-34.  It is now 44 months since the peak of the UK GDP in 2008.  After the same period in the Great Depression, the UK’s real GDP had nearly returned to its peak in 1930.

This depressing result was darkened further by the economic forecaster Ernst & Young (  Using the same forecasting methods as the UK government, E&Y reckons that the UK economy will grow less than 1% in the whole of 2011.  And they have reduced their forecast for next year from 2.2% (hardly racing!) to just 1.5%.

The UK economy is crawling out of the slump of 2008-9.  We now know from revised figures that real GDP contracted much more than previously thought in the slump – by over 7%.  And the recovery is also weak.  In an excellent post, Michael Burke at the Socialist Economic Bulletin  ( shows that the main reason that the recovery is so weak is that the Tory-Liberal coalition government has slashed back government investment just at a time when private sector investment is still unable or unwilling to take up the slack.  Burke points out that during the slump about 80% of the loss in output was due to capitalist businesses going on an investment strike.  However, since the recovery began, only half of the weakness can be attributed to a fall in private sector investment; the rest was due to the reduction in government investment.

I’ve argued in previous posts that a capitalist slump begins with a collapse in private sector investment, not a fall in household consumption, as many Keynesians argue.  The slump in household spending comes later when businesses start laying off employees or cutting wages.   Look at this graph on the components of UK real GDP since the beginning of 2008.  The slump was led by a collapse in fixed investment, which fell 22% to a trough in mid-2009, while real GDP fell 7.1%, as we now know.  But consumption fell less by 6.5% and then recovered better than GDP afterwards, up until mid-2010, when it began to decline again.

When the private sector goes on strike, the only way to keep investment going and sustain jobs is through government investment.  And yet, as part of its austerity measures, this is precisely the area that pro-business governments want to cut.  The UK coalition plans to cut government investment in roads, rail, housing, healthcare etc by 40% in real terms to 2015.  In so doing, as Burke has argued, they are extending the recession into a depression, just as happened in the 1930s, only worse!  We can see that when we break down UK investment between the private and government sector.  As government investment is only one-fifth of capitalist investment, it was not enough to avoid an overall investment slump.  But government investment did continue to rise through the slump.  It  was only when the coalition government applied its austerity cuts that it started to fall back.  In the meantime, private sector investment fell to the end of 2009 and has remained in the doldrums.

Why has not private sector investment taken up the slack as the government hoped and promised?  Well, UK corporate profitability is still struggling.   Profits (gross operating surplus) fell 13% during the slump to reach a trough in mid-2010.  Then there was a brief recovery before a flattening out.

And profitability (measured as operating surplus as share of GDP) is still below the level reached in 2005.  Government bailouts helped financial sector profitability during 2009, but that has now faded and the banks and financial sector profitability is dropping back.  The profitability of the rest of the UK corporations is still well below the peak of 2007.

Small businesses that employ the bulk of the British workforce are struggling, faced with heavy debts and low sales – so there’s no call to invest now.  Also the large corporations are reluctant to invest in the UK.  Over 40% of the top 100 UK companies are in energy, commodity resources and FIRE (finance, insurance and real estate).  Also many make their money by investing abroad, not ploughing back cash domestically.  Big profits have been made through soaring commodity and energy prices.  But investment in these sectors goes mostly abroad.  Domestic industry remains a weaker partner.  Just as British capitalism took a bigger hit than other major capitalist economies in the financial crisis, because it is so much a rentier economy, its recovery is also weaker and oriented outside the UK.

While profitability for the capitalist sector remains low and the government sector (particularly investment) is cut back by the coalition, there is little prospect of any ‘normal’ recovery in the UK economy.  Unemployment will continue towards 3m and with annualised inflation at a three-year high of 5.2% (5.6% if you include mortgage costs), average real household incomes will continue to fall, leading to further declines in real consumption.  The UK economy will remain in depression.

MEMO from London’s Evening Standard

Wealthy Greeks have pumped some £250 million into the London property market in the past year as they flee the nation’s economic chaos, industry estimates suggest.   The influx comes as Greece’s rich also seek to avoid a tax clampdown led by prime minister George Papandreou, who is attempting to stave off a devastating default after two bailouts in the past 18 months with a raft of austerity measures.   Knight Frank estimates that the Greek share of the prime central London property market – houses and flats in the £2-6 million bracket – has more than trebled to 1.7% in the past two years. This suggests around £250 million flooding in from Greece.

London property has been seen as a safe haven for investors as Europe’s debt crisis deepens – but also spells a boom for London agents charging between 2% and 2.5% commission on deals.

4 thoughts on “The weakest recovery since 1918

  1. Michael,

    You say that “When the private sector goes on strike, the only way to keep investment going and sustain jobs is through government investment. “ How about the destruction of dead labor? Seems that you only consider Keynesian solution. The borrow and spend is not a sustainable model. Is it?
    The public and private debt accumulated in countries like UK and the US cannot be paid back. Every US citizen owes $1,000,000

    The second question has to do with government published inflation rate of 5.2%. How accurate are these numbers? For the US the numbers are more realistic than government published distorted inflation rates.

    Finally, regarding the difference between profitability of small and large corporations, in another article of yours on this blog you say “Only … and the profits of large capitalist corporations have recovered.”
    If we describe Marx’s competition model as competition among industries and competition among firms within industries and the consequence of the former being equalization of rate of profit (tendential) then how would you explain the profit rate differentials between large corporations and others? How much of it would be due to state intervention via bailouts, tax give backs, lower interests, etc.?

    Also, in that same article “The level of debt … has eaten into the profitability of capital accumulation …”. Are you referring to interest payments being the cause (enterprise rate of profit)? Could you explain what you mean by that please?

    Thank you.

  2. If government investment completely replaced private sector investment, growth would be restored. But, of course, that would run right against the interests of the private profit sector because such an amount of government investment would require public ownership and planning. Government spending on infrastructure investment, say, would help the economy but it could only be large and paid for if the private sector was annexed.

    Without that, you are right – only when sufficient ‘dead capital’ is destroyed (which really means the liquidation of weak capital and its takeover by strong capital) will profitability be restored and investment can recommence under capitalism. Part of that dead capital is the debt that has been built up – and as you say, it is very high right now. Deleveraging is going to take time and probably another slump to clear.

    The inflation figures are usually underestimates, as they do not account for housing costs sufficiently. In the US, the statisticians use hedonic ‘chain’ pricing to try and account for fast falling hi-tech equipment prices. That can lead to underestimating inflation. In China, they often just make it up!

    I said that large corporation profitability is higher in the US. The general rate of profit a la Marx across the whole economy does not mean that sectors, industries and of course each company wont have different profit rates. Marx deals with this issue in Capital Vol1 and 3.

    I was developing the point above on debt in that comment that profitability for capital is lowered if the size of financial liabilities (or intangible assets) is added to tangible fixed assets to measure profit against. So I am not referring to enterprise profits (ie profits in manufacturing after interest on debt is deducted), which is a flow, but on the stock of total fixed assets which could be measured to include financial liabilities. This is an extra burden on profitability.

  3. Michael,
    In the past (say prior to the 1930s) the destruction of dead labour, or the clearance of fixed capital from the accumulation process, was accomplished via the workings of the market esp. in periodic business cycles. The devaluation of existing fixed capital also occurred through introduction of more productive technology that lowering the reproduction costs of constant capital. (Marx discusses this under “countervailing tendencies” in vol 3). To what extent is the concentration of capital today acting to counteract these “normal” recovery mechanisms? I am thinking of the “monopoly capital” school of Sweezy/Magdoff and the journal Monthly Review at present. Proponents of the falling profit rate explanation of the crisis seldom address this. Ernest Mandel gave it major prominence in his theory of “neocapitalism” if I recall correctly.

  4. Monopolisation will help maintain or increase the rate of profit for big capital at the expense of small capitals, but it does not increase the overall surplus value in an economy, so it will not raise the overall rate of profit, unless taking over the small capital leads to a destruction of their capital by liquidation etc, as you refer to. Then the same amount of surplus value is measured against a lower stock of capital (of course unemployment has risen and factories and officies have been closed). So monopolisation is one reaction by capital to falling profitability, but it cannot avert it permanently. The cycle of boom and slump is not overcome.

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