By Jane Hardy
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UK economy: smoke and mirrors

This article is over 7 years, 11 months old
Issue 388

Conflicting figures and competing forecasts for Britain make confusing reading for anyone trying to make sense of what is going on in the economy.

In early autumn 2013 chancellor George Osborne was trumpeting economic recovery, but between October and November 2013 there was a sudden slump of output in construction, and manufacturing flatlined.

By January the International Monetary Fund (IMF) was making optimistic predictions about the British economy, and the coalition is crowing over the rise in employment.

But this supposed appearance of green shoots in a stark contrast to the experience of the vast majority of people who face cuts in real pay and an increasing struggle to make ends meet.

There are four arguments that point to a much more fragile and uncertain recovery.

First, as Larry Elliott argues, at some point in 2014 the economy will emerge from the slowest recovery on record and will probably manage to return national output to its level before the Great Recession.

It is not the case that economies simply continue to spiral downwards – welfare spending for example, however pitiful, provides a floor.

People eventually purchase goods that they may have deferred and at some point firms have to replace their stocks. Although services have grown by 5 percent, manufacturing output is still down on where it was before the economy went into recession in early 2008.

Construction is 15 percent down on its pre-recession peak. The table (right) shows the way in which the economy has bumped along the bottom since 2009 with growth in 2012 at a pitiful 0.3 percent.

This is a very low base and any growth is likely to look good when measured against this.

Second, whatever the recent vacillations in output and growth, for the vast majority of people, the feel-good factor is notably absent.

According to the New Economics Foundation think-tank, low and middle earners have faced an unprecedented squeeze on their incomes, with women and part-timers disproportionately affected.

It warns that “workers on low and middle incomes are experiencing the biggest decline in their living standards since reliable records began in the mid-19th century”.

Across the European Union as a whole wages fell by 0.7 percent. But in the UK by August 2013 average hourly wages had fallen by 5.5 percent over the same period.

This was the fourth worst decline among 27 EU countries. Only Greek, Portuguese and Dutch workers have had a steeper decline.

In Britain more than 5 million people are officially classified as low paid and an increasing number of public sector workers are struggling to make ends meet.

The public sector employs 1 million low wage workers – double the previous estimate – with health workers, social care staff and classroom assistants trapped on low salaries.

In-work poverty is increasing. For the first time the number of working families living in poverty exceeds those without anyone in work.

Third, according to the Office for Budget Responsibility, what little recovery there has been in the British economy has not been driven by investment but fuelled by household spending.

This seems contradictory when set against the reality of falling wages. But in order to maintain the basic level of spending necessary, many people have used their savings.

By 2013 the ratio of 143 percent of gross household debt to income is down from 170 percent at the peak of 2008, and the ratio of people’s savings to income has fallen from 6.8 percent to 5.7 percent.

But households are still massively indebted to the tune of more than £1.5 trillion.

The debt is unevenly distributed, and somewhere between 5 and 9 million households would struggle to keep up mortgage payments if interest rates were to rise to anything like what were regarded as normal levels.

Others have had to resort to payday lenders. A report by the Office of Fair trading reported that, in the first quarter of 2009, only 1 percent of Citizens Advice Bureau debt casework clients had at least one payday loan – in the same quarter of 2012, 10 percent had at least one payday loan.

In November 2012 StepChange Debt Charity reported that the proportion of their clients with payday loan debts had increased from 3.7 percent in 2009 to 17 percent in 2012.

In addition, behind the scenes, the Bank of England has been putting money into the banking system to ensure its liquidity – what is technically called quantitative easing.

The coalition’s Help to Buy scheme has, in effect, pumped more money into the economy.

It has increased demand, but because there is little new housing it lays the foundations for a new housing bubble.

House prices have risen by 6.5 percent across the UK in the 12 months to November, and in London they have hit double digits.

Fourth, the fortunes of the UK economy cannot be considered in isolation from the trajectory of global capitalism. Although that is showing signs of recovery there are still deep structural imbalances that render the system even more unstable.

For example, the trade balance of Germany and mirror deficit of other EU countries, particularly the southern and eastern states, means that the euro crisis is deferred rather than resolved.

Growth in the European Union is painfully low. In 2012 GDP fell by 0.4 and the prediction for 2013 was zero growth.

The narrative of the IMF has changed. Last year’s accolades about emerging markets while core capitalist economies stagnated have been replaced by fears about falls in growth in China’s economy underpinned by huge debts and property bubbles.

Hopes for crisis-free stable growth are likely to remain elusive.

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