In my recent post on the US economy (https://thenextrecession.wordpress.com/2014/05/02/it-was-the-bad-winter/), I poured some cool water on the consensus view that the US economy was set to accelerate its expansion this year. The US GDP figures for the first quarter of 2014 were very weak (although they will probably be revised upwards) and the stronger headline jobs figures released on Friday hid the continued high number of Americans who want a job but have given up looking, as well as those taking low-wage work as better than nothing.
But if we turn to the UK, the current talk is how things are looking way better. Most mainstream economists reckon that it’s all over and Britain is now on a sustainable path of growth. Indeed, the IMF reckons that of the top seven capitalist economies, the UK will grow the fastest this year. Last week, the UK manufacturing activity index was released for April and it showed activity in this key sector growing at its fastest pace for five months, reaching 57.3 from 55.8 in March. This followed the GDP figures where the UK economy expanded by 0.8% in the first quarter, with the manufacturing sector rising 1.3%, while profit margins rose again. Sterling rose to a five-year high and is the best performing major currency in the world over the past 12 months.
So this all looks good and the Conservative-led government continues to crow that its policies of austerity have worked. Even the Keynesians now seem convinced that the economy is turning around for good. Arch-Keynesian Simon Wren-Lewis from Oxford University attacked those who continued to doubt the economic recovery (29 April): “What about the counter argument that the recovery is not real, or not sustainable. In some ways this rhetoric is worse than the ‘austerity works’ line: it is also wrong, but it is much less likely to succeed as rhetoric. The rhetoric will not work because, despite the unequal and uneven nature of the recovery, many people do feel more optimistic now than two years ago.”
Well, feeling good is not the same as being good. The activity indexes may be strong. But, although manufacturing output is growing at its fastest for five years, it is still shy of its peak in 2008 before the Great Recession hit the UK economy. Despite a large devaluation of sterling as a response to the financial crash, exports have not made much progress and the UK’s deficit on trade with the rest of the world remains very high. The UK’s government budget deficit is still the highest among the G7 economies. The real joker in the pack for the message that the UK economy is heading for 3%-plus real growth this year and next is that, just as in the US, the capitalist sector is not investing. In the activity indexes, it was notable that investment goods orders slowed.
Wren-Lewis goes on that “It is much better for critics of the government to focus on the ‘wasted years’ of 2010-2012, and on the fall in median incomes (http://cep.lse.ac.uk/pubs/download/cp422.pdf) over the last five years. If they want economic issues for today and tomorrow, focus on inequality.” Yes, they are key issues: the failure of the British capitalist economy over not just 2010-12 but during the Great Recession and the unprecedented (since the 1930s) reduction in the real incomes of the British people over the last five years. But that does not mean we have to accept the view that all is now fine and dandy with the British economy.
The Bank of England published a very interesting paper that showed just how far behind the UK economy is in this ‘recovery’ phase (and see comments on the super blog by Rick, http://flipchartfairytales.wordpress.com/2014/04/29/britain-is-coming-back-well-yes-but/). The figures that follow are in that BoE paper (http://www.ons.gov.uk/ons/dcp171766_360847.pdf). The UK’s real GDP has still not quite got back to its pre-slump peak in 2007. Yet all the other G7 economies (except Italy) have passed that benchmark. Of course, as I pointed out in a recent post (https://thenextrecession.wordpress.com/2014/04/11/5-trillion-gone-forever/), none of the G7 can recoup the losses in output, employment, investment and income that the Great Recession caused. That’s gone forever.
And if you look at GDP per head of population, the UK record is even worse, with the UK lagging behind the Eurozone average and still nowhere near restoring the pre-recession position. What that tells you is that the UK economy has only expanded because of a big influx of immigrants into the country. It’s population not productivity that is growing.
Wren-Lewis does not like this argument: “The fact that growth in output per person (GDP per capita) is less impressive that GDP growth alone does not detract from the recovery because, in a demand led recession, population growth does not automatically cause GDP growth. Recoveries are often led by consumers, but as long as investment follows on and average incomes begin to rise then a recovery will become sustainable.” The trouble is that investment is not ‘following on’. It remains some 20% below its peak in 2008.
Including all investment (in property, business and government), the UK’s investment ratio remains the lowest of all major capitalist economies.
Before the global financial crash broke in 2007-8, I wrote in my book, The Great Recession, that, because the UK was essentially a ‘rentier’ economy i.e. relying increasingly on earnings from rent (property), interest (often from abroad) and foreign capital flows, it would suffer the most from any global crash and take the longest to recover. So it has proved. The BoE shows that the financial services sector, which contributed up to nearly 10% of UK GDP in 2009, much more than even the US financial sector, has dropped 30% to under 7% of GDP.
With the finance sector in the doldrums, the UK economy needed a boost from somewhere else. The answer from the government has been to fuel a new property boom with cheap and subsidised mortgages. Property prices exploded in central London and have slowly filtered to the rest of the country, now rising in double-digit rates. But there has been no corresponding rise in business investment which remained a drag on growth in the UK economy in 2013.
One of the features of the employment market in the UK in this ‘boom’ has been the huge rise in self-employed workers. The number of firms with fewer than ten employees has swelled by 550,000 since 2008. While in mid-2013, there were 5.7m people working in the public sector, only 18.8% of total employment, the lowest since records began in 1999. Indeed, the self-employed will outnumber those working in the public sector in four years, once the government has completed its slashing of public sectors jobs and services.
The right-wing City of London mouthpiece, City AM editor, Allistair Heath tells us that this is really good news for the economy. “This is clearly a golden age for entrepreneurship, especially in London, but there is more to it than that. Self-employment surged 17 per cent over the past five years and is still rising; while at first the increase was made up of people who preferred to work as consultants rather than being forced to sign on to the dole, many of the more recent entrants appear happy with the choice. In the past, recoveries in the labour market were driven by increased demand for workers; today, it is just as much a case of a better, more flexible and more entrepreneurial supply creating its own demand.” Heath goes on to tell us that ‘zero hours contracts’ and choice between self-employment, working on call and part-time work shows how ‘flexible’ the UK labour market has become, thanks to deregulation and the weakening of the unions under Thatcher and Blair. “We need to build on this flexibility.”
Really? Actually, the Global Entrepreneurship Monitor statistics show that the proportion of new entrepreneurs in the UK driven by valuable opportunities has fallen – from a high of 61 per cent in 2006 to 43 per cent in 2012. And ONS figures show that a falling number of self-employed people employ other workers, suggesting that the rise in self-employment is not translating into new, thriving businesses. Researchers at the University of Warwick found that, in less prosperous areas of the UK, policies to increase firm formation had a negative impact on long-term employment, as those who started new companies had low skills, few other options, and poor market prospects.
What is really behind the increase in self-employed is not ‘entrepreneurial spirit’ but the loss of benefits and the ability of self-employed to claim tax credits under the government ‘welfare reforms’. As Richard Murphy at Tax Research has pointed out, the self-employed now account for 14 percent of the employed workforce but 19 percent of working tax credit claimants. In other words, those working for themselves are more likely to be claiming tax credits than those in employment. Actually the self-employed, like the employed are earning less than they did before the slump. In 2007-08, 4.9 million self-employed earned £88.4bn, but in 2011-12, 5.5 million self-employed earned £80.6bn. Indeed, the Resolution Foundation found that that self-employed weekly earnings are 20% lower than they were in 2006-07, while employee earnings have fallen by just 6%. As a result, the typical self-employed person now earns 40% less than the typical employed person. (http://www.taxresearch.org.uk/Blog/2014/05/06/its-not-just-inequality-that-is-rising-rapidly-insecurity-is-too/#sthash.xf5ecfiB.dpuf)
The UK economy is growing faster in GDP terms, but average real incomes are not rising because those in employment and self-employment are, on average, still unable to increase their incomes sufficiently to cover inflation and taxes. Investment by the capitalist sector is not recovering and British businesses are failing to raise their share in world export markets (graph below).
So the expansion of UK economic activity is driven by a credit-fuelled and government-sponsored property boom. That cannot be sustainable. But it may be long enough until next May’s general election.