British capitalism: a recovery built on sand

Despite spirited attempts to talk up the recovery of the British economy, the hard, cold economic reality continues to deflate such claims. Five years after the bankruptcy of the financial services multinational Lehman Brothers, widely seen as precipitating the global financial crisis, British economic growth still remains some 3.3% below its pre-recession peak. Britain’s workers are enduring the most protracted squeeze on incomes since the long depression of the 1870s: over four years of falling real wages with more to come. Investment and productivity are stagnant and whatever growth is occurring is driven by debt-fuelled consumer spending and inflated house prices. Government claims that it is ‘rebalancing’ the British economy, away from consumption towards exports and investment, are mere empty rhetoric. David Yaffe reports.

Recreating the housing market bubble

Stimulating the housing market has been a critical factor in the return to growth since the start of the year. In mid-September the Office of National Statistics (ONS) reported that house prices in England in July passed their previous peak of five years ago, with the property price index 0.9% higher than in January 2008. The average price of a home in England reached £255,000, a rise of 3.7% over the previous year, with the average London home costing £438,000, up 9.7% on the year. The cost of the average UK home rose slightly less to £245,000, up 3.3% on July last year, after falls in house prices of 2% in Scotland and 0.7% in Wales. These developments in the housing market are driven by the government’s Funding for Lending scheme, which was introduced in August 2012 and gives banks and building societies access to cheap cash. It was supplemented by the more recent Help to Buy scheme announced in last March’s Budget which subsidises house purchases.1

Mortgage lending was at a five-year high in July, reaching £16.6bn, a 29% increase on July 2012 and the highest total since October 2008. Buy-to-let mortgages, 10% of all mortgages, have surged to levels last seen before the financial crash. Lending to first-time buyers has risen 31% over the past year. The fastest growing sector of the British economy seems to be real estate. There was a 9.9% rise in employment in this sector in the three months to June, with 50,000 new jobs, the fastest percentage rise of any other sector of the economy. 562,000 are now employed in real estate, the highest level since records began in 1978, and 100,000 more than at the peak of the boom in 2008. House prices are almost certain to rise further in the coming years with many, including the Coalition’s Business Secretary Vince Cable, warning of a housing bubble. Now, even Chancellor George Osborne has felt it necessary to give the Bank of England an emergency brake on the government’s Help to Buy scheme, enabling it to intervene should there be signs of it creating a housing boom. Debt servicing costs are at present very low and will remain so for some time, with the new Governor of the Bank of England, Mark Carney, pledging to hold interest rates at 0.5% until unemployment falls below 7%. Were interest rates to rise a few percentage points, however, many mortgage borrowers would find themselves in serious financial difficulty. As we go to press the government has contemptuously brought forward by three months the more far-reaching second strand of the Help to Buy scheme.

Outlook for economic growth

In the second quarter of 2013, GDP was 3.3% below its pre-recession peak and around 18% below its 1980-2007 trend. This is the slowest British recovery from recession on record. Despite record low interest rates, economic growth since the Coalition government took office in May 2010 has been dismal. The economy has grown only 2.2% over the three years from 2010 to 2013. This should be compared with the growth forecast of 8.2% by the Office of Budget Responsibility in June 2010 (Financial Times 27 September 2013). Since 2008, the UK population has grown by 3% to 63.7 million. This means that on a per capita basis the economic situation is worse. A recent analysis by the TUC has shown that GDP per head is still 0.7% lower than when the Coalition government took office and 7.5% lower than the pre-crisis peak.

Unemployment, still at an appalling level of 2.49 million or 7.7% of the workforce, has marginally fallen over the recent period with the Coalition proclaiming it has created a record number of jobs. This has been possible not only because 77% of these jobs are in low-waged sectors but also because labour productivity is so low and has actually fallen to 2005 levels. According to the ONS, output per hour of UK workers in 2012 was 2% below pre-crisis levels in 2007 and 16% below the average of other major industrialised nations. It was 29% lower than in the US and 24% lower than in France or Germany. Hardly a record to shout about.

Business investment was 10% lower in 2012 than in 2010 with corporations holding large amounts of cash on their balance sheets. It is now 25% below the pre-recession peak. The decline continues with latest ONS figures showing that at the end of the second quarter of 2013, business investment has fallen 2.7% on the previous quarter and is 8.5% down on the same quarter a year earlier. Manufacturing is still 10% below its pre-crisis level. There is not much evidence of progress towards ‘rebalancing’ the British economy.

Britain has been running balance of payments deficits for decades. At the end of 2012 Britain had a balance of payments deficit of £57.7bn or 3.7% of GDP. The collapse of earnings on Britain’s international investment account had left Britain’s balance of payments at the worst level, as a proportion of GDP, since 1989. The deficit on trade in goods reached a staggering £106bn. Without the large surplus on services trade of £70.2bn – financial services being responsible for more than 70% of this - given the low net earnings on the international investment account, the balance of payment deficit would have been much greater. Britain is living far beyond its means. This situation is becoming unsustainable.

The outlook is not good for the British economy, increasingly vulnerable to international instability and largely dependent on the financial services sector and the City of London. The eurozone is barely out of recession and the outlook in the bailed-out southern eurozone economies is precarious; growth is rapidly slowing in the so-called emerging economies and clashes between Republicans and Democrats in the US Congress, which must pass a new budget by 1 October, could trigger a partial government shutdown with serious economic repercussions.

Falling standard of living...

Prices have risen faster than wages in 38 out of 39 months of the Coalition government. Inflation has remained above the government’s target of 2% throughout. The TUC has calculated that average pay has fallen 6.3% in real terms over the last five years. For a 40-hour week a worker will be £30.30 a week worse off than in 2008 or around £1,570 a year.

In the two years to December 2012, according to the TUC, the number of temporary workers in the UK increased by 89,000 to 1,650,000 – 46% of the rise in employment in that period. More than 1 million workers are on zero-hours contracts, which generally offer no guarantee of work, nor holiday and sick pay. Research by the UNITE union suggests as many as 5.5 million people could be on such contracts. This kind of employment creates precarious and unstable low-paid jobs for millions of workers. It is representative of the brutal assault on working class living standards that has become a predominant feature of economic and social life in Britain as the Coalition government attempts to sustain Britain’s parasitic and decaying capitalist economy and with it the wealth and power of the financial and corporate elite.

...and rising living standards

UK bank profits have been undermined in the recent period by the fines and compensation payments forced on them by financial regulatory authorities as a result of their fraudulent activities and the mis-selling of financial products to millions of their customers. The return on their equity has roughly halved compared to 2005 levels from nearly 20% to 10% now. Bankers’ pay and bonuses, however, as well as the pay of other highly-paid workers continue to be protected and the Coalition government takes whatever measures it can get away with to ensure this is the case.

Britain’s high-paid workers were allowed to delay bonus payments, worth up to £1.7bn, from the tax year 2012-2013 until April 2013 to take advantage of the Coalition government’s 5p cut in the top rate of tax. According to the ONS, payouts of bonuses were £1.7bn higher in April 2013 than in the same month last year. This represented a loss of revenue to HMRC of around £85m. Bonuses in the finance sector are rising again, reaching £10.5bn in 2013, a rise of 13% once the delayed bonuses are taken into account.

Five years to the day after Lloyds took over the bankrupt HBOS, which led to a £21bn bailout of the bank, the government started the process of reprivatising Lloyds Banking Group by selling 6% of the shares. The Treasury claims to have made a profit of £61m on the original price by selling them at 75p a share, raising in total about £3.3bn. The UNITE union was not impressed. It had seen around 45,000 jobs lost since the bailout of the bank. It accused the government of a ‘fire sale’ while Parliament was in recess. According to UNITE, if the original share price of 73.6p a share was adjusted for inflation, the break-even price would be around 93p and the sale, therefore, had created a £770m loss rather than a profit.

The financial sector led by large international banks lies at the heart of the British imperialist economy. The government will take all steps necessary to sustain that financial sector and the support of its highly-paid corporate bankers. That is why George Osborne is prepared to fight to protect bankers’ bonuses and has launched a legal challenge to the European Union’s proposed cap on bankers’ bonuses on the grounds that the cap undermines financial stability.2 He has little choice in his attempt to save a system facing long-term decline.  

1 See David Yaffe ‘The British economy: Spinning a recovery’ in FRFI 234 August/September 2013 for a discussion of these schemes. On our website at www.revolutionarycommunist.org/capitalist-crisis/3104

2 See above article at: www.revolutionarycommunist.org/capitalist-crisis/3104

 

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