AMID NEW Labour's long and growing list of crimes and failures, the government's defenders constantly cite one factor in its favour-the allegedly strong state of the economy.
In his recent budget speech Gordon Brown boasted that Britain grew faster last year than any other member of the Group of Seven (G7) leading industrial countries. But the fact that a modest 2.2 percent growth rate put Britain top of the league is more evidence of the recession that gripped the United States, continental Europe, and Japan than it is a tribute to British dynamism. In any case, the picture is changing. Britain was the worst performing of the G7 economies in the first quarter of 2002.
Indeed the British economy didn't grow at all during the six months to the end of March. One economist told the Financial Times, 'Britain was a hair's breadth away from a recession at the turn of the year.'
This sluggish performance reflects the fact that the British economy is suffering from a version of the same cycle of boom and bust that sent the US into recession two years ago.
The City of London is one of the world's leading financial centres. This means that Britain is particularly vulnerable to the surges of euphoria and despair that sweep through global financial markets. Thus when the US's Wall Street blew up a huge speculative bubble in the late 1990s, London experienced the same process. The shares of 'New Economy' hi-tech firms soared.
Their stratospheric share ratings encouraged these companies to spend heavily in the expectation of huge profits to come. As it became clear that these expectations were founded on illusion, the stock market collapsed, leaving hi-tech firms saddled with huge investments on which they have no hope of making a profit.
Heather Stewart wrote in the Guardian last week, 'The best-known example of high-tech hubris was the £22.5 billion which five telecoms firms paid the government for a slice of Britain's 3G spectrum after a bidding frenzy in spring 2000.
'But hi-tech manufacturers had also responded to the market's financial vote of confidence by building up their production capacity, preparing themselves for the expected flood of demand. When investors pulled the plug last year, the hi-tech sector led British manufacturing into a painful recession, with 144,000 workers laid off in 2001 alone. Output of telecoms equipment fell by almost 50 percent in the 12 months to March; production of TV, radio and other electronic equipment dropped by almost 20 percent.'
Economists estimate that, despite these falls in output, the overcapacity that firms built up during the boom has not been cut. Investment fell for the fifth consecutive quarter in the first three months of 2002. The strength of the pound relative to the euro makes British goods expensive in the key European markets.
So manufacturing industry can't export its way out of recession. Consumer spending is keeping the British economy afloat. Retail sales rose by 1.7 percent in April, three times as fast as economists had predicted. Underpinning this robust consumer spending is the rapid growth of debt.
The dissident economist Wynne Godley wrote in last Sunday's Observer, 'The growth of the economy in the past five years has to a significant extent been powered by rising consumption, which has in turn been largely powered by a rise in lending.'
What Godley calls net lending-mortgages plus consumer credit-has risen from just over 4 percent of disposable income in 1996 to nearly 12 percent at the start of 2002.
He calculates that, if net lending continued to make the same contribution to economic growth for the next five years, it would rise to around 20 percent of disposable income.
This is higher than the level reached in 1988, when Margaret Thatcher's Chancellor of the Exchequer, Nigel Lawson, let borrowing go through the roof. When interest rates started rising, the ensuing credit crunch drove the economy into the deep recession of the early 1990s, and in the process destroyed John Major's government.
At the minute both unemployment and interest rates are relatively low. The housing boom, which is pushing prices up at a rate of more than 15 percent a year, means that homeowners feel better off. Together these factors are encouraging consumers to borrow and spend more. But if interest rates rise and/or house prices fall, this picture could change very quickly.
No wonder the Monetary Policy Committee of the Bank of England is being so cautious about raising interest rates. If Godley is right, the British economy has been 'set, yet again, on an unsustainable path'.
Alex Callinicos is the author of The Revolutionary Ideas of Karl Marx and a contributor to Marxism and the New Imperialism. Both are available from Bookmarks- phone 020 7637 1848 or go to www.bookmarks.uk.com