Full of self-importance after his jaunt to the G20 meeting of world leaders in Brisbane Australia, the British Prime Minister, David Cameron, declared in an article in The Guardian (17 November 2014) that ‘red warning lights are once again flashing on the dashboard of the global economy’. He pointed to the eurozone on the brink of a third recession, the slowing of growth in the emerging market economies, the stalling of global trade talks, the Ebola epidemic and the escalating conflicts in Ukraine and the Middle East as ‘all adding a dangerous backdrop of instability and uncertainty’. He contrasted this to the British economy which, he said, is the fastest growing in the G7 major capitalist countries, with record numbers of new businesses and the largest ever annual fall in unemployment. But Cameron, preparing his excuses well in advance of the coming General Election, warned that ‘in our interconnected world’ these wider problems in the global economy ‘pose a real risk to our recovery at home’. David Yaffe reports.
A week earlier the Governor of the Bank of England (BofE), Mark Carney, had put forward his own gloomy prognosis. Echoing the words of Marx and Engels in the Communist Manifesto during the presentation of the BofE’s monetary policy committee’s quarterly inflation report, he declared: ‘A spectre is now haunting Europe – the spectre of economic stagnation’, with growth in the eurozone disappointing and confidence falling back.
In the third quarter of 2014, the eurozone’s two largest economies narrowly avoided recession (a fall in GDP in two successive quarters): Germany growing by 0.1% and France by 0.3%. Growth in France was driven primarily by a 0.8% rise in government spending. Italy, the third largest economy in the eurozone, suffered its third recession since the financial crash, with growth falling by 0.1%. Overall the eurozone grew by 0.2%, a small increase on the 0.1% growth experienced in the second quarter of 2014. Eurozone GDP is still more than 2% below its level at the beginning of 2008. Eurozone inflation in October at 0.4% was marginally higher than the 0.3% of September but well below the European Central Bank’s target of just under 2%. A more expansionary monetary and fiscal policy to stimulate economic growth in the eurozone has so far been blocked by the German government.
Preliminary data for July to September show Japan falling back into recession again. The Japanese economy unexpectedly contracted by 1.6% on an annualised basis in the third quarter of 2014. It had been expected to grow by 2.2%. This came after a 7.3% fall in GDP on an annualised basis in the second quarter of 2014. This is the fourth time since the financial crash in 2008 that Japan has been in recession. The US has now ended its $4.5 trillion quantitative easing programme, tightening its monetary policy. Overall the global economy is stalling and red warning lights are, indeed, flashing.
Record debt levels
A new report, Deleveraging? What Deleveraging? (the Report) highlights the record debt levels existing throughout the global economy.1 It argues that contrary to widely held beliefs, six years on from the financial crisis the deleveraging process to bring down the global debt-to-GDP ratio has not yet begun. On the contrary, the debt ratio is still rising to an all-time high. The ratio of global total debt to GDP, excluding the financial sector (financials), rose 38 percentage points, from 174% in 2008 to 212% in 2013 (p11). Since the financial crisis the ratio of public debt to GDP increased by 46 percentage points in the UK, 40 points in the US and 26 points in the Eurozone (p16). The Report points to ‘the poisonous combination of high and rising global debt and slowing nominal GDP, driven by both slowing real growth and falling inflation’. It goes on to argue that the ongoing vicious circle of high levels of leverage (debt/asset ratios) and policy attempts to deleverage, on the one hand, and slower nominal growth on the other, set the basis either for painful deleveraging or another crisis, possibly originating in the emerging economies, with China being the highest risk (p19). The total debt/GDP ratio, excluding financials, of the developed capitalist economies (DM) reached 272% in 2013, with that of Japan at 411%, the UK at 276%, the US at 264% and the eurozone at 257%. With financials the totals rise significantly as a ratio to GDP: DM at 385%, Japan at 562%, UK at 495%, the eurozone at 385% and the US at 362% (p15).
Martin Wolf, the chief economist of the Financial Times in commenting on the Report warns that ‘a great deal more trouble lies ahead’ (8 October 2014). He laments that the world economy seems incapable of generating growth without an unsustainable credit boom appearing somewhere. In the last 25 years, he says, a credit boom in Japan collapsed after 1990; a credit boom in Asian emerging economies collapsed in 1997; a credit boom in the north Atlantic economies collapsed after 2007, and finally China, whose total debt (excluding financials) has risen a spectacular 72 percentage points to 220% of GDP (p68) in its attempt to offset the loss of export earnings after the financial crash in 2008, could be next. Each credit boom, says Wolf, ‘is greeted as a new era of prosperity, to collapse into crisis and post-crisis malaise.’2 Red warning lights indeed.
Britain’s sham recovery
In his 17 November Guardian article, Cameron claims that, because of the ‘difficult decisions’ made by the government over recent years, Britain has the fastest growing economy in the G7 countries, ‘with record numbers of businesses, the largest ever annual fall in unemployment, and employment up 1.75 million in four years: more than the rest of the EU put together.’ What he fails to tell us is that the recovery of the economy is largely based on debt-fuelled consumer spending and inflated house-prices, accompanied by stagnant productivity, falling wages, and millions of workers in insecure jobs. Inequality and poverty are growing. And further, all of this has been accompanied by savage welfare cuts that are having devastating consequences for the lives of millions of British people.3
According to the Office of National Statistics (ONS), productivity (output per hour) in the UK economy was 17 percentage points below the average for the rest of the major G7 industrialised economies in 2013, the widest productivity gap since 1992. Between 2007 and 2013 output per hour in the UK economy fell by 3%, the worst performance of the G7 major capitalist countries. In 2013 UK productivity was only 76% of US levels and well below that of France and Germany at 88% and 85% of US levels respectively (Financial Times 14 November 2014). Productivity continues to fall. This stagnant productivity explains how the UK economy can have weak growth and rising employment, at the cost of falling wages.
GDP is certainly higher than its pre-crisis peak in the first quarter of 2008, but, once the 3.5 million rise in the population since then is taken into account (from 60.5 to 64 million), GDP per capita is still around 3.4% lower than it was before the financial crash some six years ago. By April 2014 British workers’ real pay had fallen for the sixth year running, back to levels paid in the early 2000s. Since their peak in 2008, average wages have fallen in real terms by 9.2%. This does not take into account the differential rates of inflation affecting different sections of the workforce. For example, in the six years from early 2008 to early 2014, according to the Institute of Fiscal Studies, the cost of energy rose by 67% and the cost of food by 32%. Over the same period the retail price index went up by 22%. The poorest fifth of households spent 8% of their budgets on energy and 20% on food, whilst the richest fifth spent 4% on energy and 11% on food. There are clearly different rates of inflation for the poor and rich.
Cameron claims that employment has gone up 1.75 million over the four years the Coalition government has been in office. But what kind of jobs have been created and at what level of pay? TUC research shows that employment increased by 1.08 million from the first quarter of 2008 to the second quarter of 2014. Job creation has been dominated by rising self-employment and part-time work. Only 1 in every 40 new jobs created since the recession has been full-time, 24 in every 40 have been self-employed and 26 in every 40 have been part-time. 4.6 million people are self-employed, accounting for 15% of those in work, the highest percentage point in the past four decades and a rise of 732,000 since the first quarter of 2008. Average income from self-employment has fallen 22% since 2008/9. In 2014 9.9%, or 3 million, of those in work in the UK were underemployed and wanting to work more hours (ONS). Insecure, low-paid jobs mean that record numbers of working families live in poverty, with two-thirds of people who found work taking jobs for less than the living wage according to the Joseph Rowntree Foundation.
Cameron makes it clear that the government ‘will stick to [its] plan on the deficit and continue to use monetary policy to support growth without adding to borrowing or debt’. The Coalition’s austerity programme has been spectacularly unsuccessful in reducing public debt. Even its new target of eradicating the public sector current deficit by 2017–18 is unachievable without politically unsustainable cuts in public services or very significant rises in tax. It would require around £17bn more spending cuts on top of the £8.5bn departmental cuts already planned for 2015–16. The Chancellor George Osborne will challenge the Labour Party to match his plans in his Autumn Statement on 3 December. Labour has tried to keep its options open. Ed Balls says Labour will continue with austerity but will bring the current deficit into balance ‘as early as possible in the next parliament’. He has said that the Tory spending plans after the 2015 election are a fantasy. Osborne will put him on the spot. As it is, Osborne’s planned borrowing is way off earlier plans, exacerbated by the government’s savage austerity programmes. Tax revenues are far below government plans. Latest figures suggest extra borrowing of up to £15bn will be needed to reach the 2017–18 target, necessitating much deeper and even more politically explosive cuts.
Even this disastrous state of public finances has not deflected the Tory party’s intention to fight the next election on a platform which includes tax cuts. Cameron recently promised to increase the personal tax allowance to £12,500 and the higher-rate tax threshold from £41,865 to £50,000. This will cost around £7.2bn. A senior Treasury official called this ‘a potential disaster’ and the Coalition’s Business Secretary, Vince Cable, dismissed it as a ‘total fantasy’. This is no fantasy but the reality of intensifying class war in austerity Britain.
1. Geneva Reports on the World Economy 16 (Report) by the International Centre for Monetary and Banking Studies, September 2014. Page numbers in brackets refer to this report.
2. Wolf, originally a strong advocate of neo-liberal globalisation, now admits that he failed to anticipate a meltdown in the global capitalist system. For a discussion of his failure to understand the structural crisis of the capitalist system grounded in an overaccumulation of capital in the heartlands of capitalism, see David Yaffe ‘Global economic recovery falters’ in FRFI 236 December 2013/January 2014 at http://tinyurl.com/mzbdt27 on our website.
3. See David Yaffe ‘British Economy: On the path to a new crisis’ in FRFI 240 August/ September 2014 at http://tinyurl.com/pe9ohqj on our website and earlier articles.
Fight Racism! Fight Imperialism! 242 December 2014/January 2015