The economic crisis in Britain
The text that follows is, apart from a few minor changes, the economic part of the report on the situation in Britain for the 19th Congress of the ICC’s section in Britain. We thought it would be useful to publish it to the outside since it provides a number of factors and analyses which enable us to grasp how the world economic crisis is expressing itself in the world’s oldest capitalist power.
The international context
In 2010 the bourgeoisie announced the end of the recession and predicted that the world economy would grow over the next two years led by the emerging economies. However, there are serious uncertainties about the global situation, reflected in differing projections of growth. The IMF in its World Economic Outlook Update of July 2010 predicted global growth of 4.5% this year and 4.25% next. The World Bank in its Global Economic Prospects report for summer 2010 envisaged growth of 3.3% this year and next and 3.5% in 2012 if things go well but of 3.1% this year, 2.9% next and 3.2% in 2012 if things do not go well. The concern is particularly centred on Europe where the World Bank’s higher estimate is dependent on “Assuming that measures in place prevent today’s market nervousness from slowing the normalization of bank-lending, and that a default or restructuring of European sovereign debt is avoided”. The lower growth rate if this is not achieved will affect Europe particularly, with predicted growth rates of 2.1, 1.9 and 2.2 percent between 2010 and 2012.
Source: IMF World Economic Outlook Update, July 2010
The situation remains fragile with concern about high levels of debt and low levels of bank lending and the possibility of further financial shocks, such as that in May this year that saw global stock markets lose between 8 and 17% of their value. The scale of the bailout is itself one of the causes of concern: “the size of the EU/IMF rescue package (close to $1 trillion); the magnitude of the initial market reaction to the possibility of a Greek default and eventual contagion; and continued volatility, are indications of the fragility of the financial situation…a further episode of market uncertainty could entail serious consequences for growth in both high-income and developing countries.” The prescription of the IMF, as one might expect, is to reduce state spending, with the inevitable result that the working class will face austerity: “high-income countries will need to cut government spending (or raise revenues) by 8.8 percent of GDP for a 20 year period in order to bring debt levels down to 60 percent of GDP by 2030.”
For all their appearance of objectivity and sober analysis, these recent reports by the IMF and World Bank suggest there is a depth of uncertainty and fear within the ruling class about its ability to overcome the crisis. The possibility of other countries following Ireland back into recession remains real.
The evolution of the economic situation in Britain
This section draws on official data to give an overview of the course of the recession and the response from the government. However, it is important to begin by recalling that the crisis began within the financial sector, stemming from the crisis in the US housing market and encompassing the major banks and financial bodies around the globe that had become involved in lending where there was a real risk of the loans not being paid back. This was at its most extreme in the sub-prime mortgage market in the US, the contagion from which spread through the financial system because of the trading that developed based on the financial instruments derived from these loans. However, other countries, notably Britain and Ireland, had contrived to produce their own housing bubbles that contributed, together with a massive rise in unsecured personal borrowing, to create a level of debt that in Britain ultimately exceeded the country’s annual GDP. The crisis that developed flowed across into the ‘real’ economy leading to recession. The whole situation evoked a very forceful response from the British ruling class that poured unprecedented sums of money into the financial system and cut interest rates to a historic low.
Official figures show that Britain went into recession in the second quarter of 2008 and came out in the fourth quarter of 2009 with a peak to trough fall of 6.4% of GDP. This figure, which was recently revised downwards, makes this recession the worst since the Second World War (the recessions of the early 1990s and 1980s saw falls of 2.5% and 5.9% respectively). Growth in the second quarter of 2010 was 1.2%, increasing significantly from the 0.4% of the fourth quarter 2009 and 0.3% of the first quarter 2010. However, it is still 4.7% below the pre-recession level as can be seen in the graph above.
The manufacturing sector has been the most affected by the recession, registering a peak to trough decline of 13.8% between the fourth quarter in 2007 and the third quarter of 2009. Since then manufacturing has expanded by 1.1% in the last quarter of 2009 and by 1.4% and 1.6% in the two quarters since.
The construction industry showed a sharp rebound in growth of 6.6% in the second quarter of 2010, contributing 0.4% to the overall growth rate for that quarter. However, this follows very substantial declines in both house building (down 37.2% between 2007 and 2009) and commercial and industrial work (down 33.9% between 2008 and 2009).
The service sector recorded a peak to trough fall of 4.6% with business and financial services falling by 7.6% “much stronger than in earlier downturns, making the largest single contribution to the fall”. In the last quarter of that year it returned to growth of 0.5% but in the first quarter of 2010 this fell to 0.3%. Although the decline in this sector was less than in others, its dominant position in the economy meant that it was the largest contributor to the overall decline in GDP during this recession. The decline in the service sector was also greater in this recession than those of the early 1980s and early 1990s where the falls were 2.4% and 1% respectively. More recently, the business services and finance sector has shown stronger growth and contributed 0.4 percentage points to the overall GDP figure.
As might be expected both exports and imports declined during the recession. This was most marked in the trade in goods (although the balance actually improved slightly): “In 2009 the deficit fell by £11.2 billion to £81.9 billion. There was a record fall in exports of 9.7 per cent – from a record £252.1 billion to £227.5 billion. However, this was accompanied by a fall in imports of 10.4 per cent, the largest year-on-year fall since 1952, which had a much larger impact since total imports are significantly larger than total exports. Imports fell from a record £345.2 billion in 2008 to £309.4 billion in 2009. These large falls in both exports and imports were a result of a general contraction of global trade associated with the worldwide financial crisis which began late in 2008.” The decline in services was smaller, with imports falling by 5.4% and exports by 6.9% with the balance, which remained positive, going from £55.4bn in 2008 to £49.9bn in 2009. The total trade in services in 2009 was £159.1bn in exports and £109.2bn in imports, which is significantly less than that of the trade in goods.
Between 2008/9 and 2009/10 the current account deficit doubled from 3.5% of GDP to 7.08%. The Public Sector Net Borrowing Requirement, which includes borrowing for capital spending, went from 2.35% of GDP in 2007/8, to 6.04% in 2008/9 and 10.25% in 2009/10. In 2008 it was £61.3bn and in 2009 £140.5bn. Total government net debt was calculated to be £926.9bn in July this year or 56.1% of GDP, compared to £865.5bn in 2009 and £634.4bn in 2007. In May 2009 Standard and Poor raised the possibility of downgrading Britain’s debt status from the highest triple A rating, which would have led to significant increases in borrowing costs.
The number of companies going bankrupt increased during the recession, rising from 12,507 in 2007 (which was one of the lower figures for the decade) to 15,535 in 2008 and 19,077 in 2009. The number of acquisitions and mergers rose during the second half of the decade to reach 869 in 2007 before falling over the next two years to 558 and 286 respectively. Figures for the first quarter of 2010 do not suggest any increase is taking place. This suggests that while there has been destruction of the capital associated with the businesses going insolvent this has not yet led to a general process of consolidation as might be expected coming out of a crisis, which itself may indicate that the real crisis remains with us.
During the crisis the pound fell sharply against a number of other currencies, losing over a quarter of its value between 2007 and the start of 2009, prompting the Bank of England to comment “The fall of more than a quarter since mid-2007 is the sharpest over a comparable period since the breakdown of the Bretton Woods agreement in the early 1970s” There has been a recovery since but the pound remains about 20% below its 2007 exchange rate.
House prices fell sharply after the bursting of the property bubble and although they began to rise again this year they remained substantially below their peak and in September fell again by 3.6%. The number of sales remains at a historic low.
The stock market suffered sharp falls from mid 2007 and, although it has recovered since then, there is still uncertainty. The concerns about the debts of Greece and other countries prior to the intervention of the EU and IMF led to a significant fall in May this year as the graph below shows.
Source: The Guardian
Inflation rose to nearly 5% in September 2008 before falling to below 2% a year later. It has since risen to over 3% during 2010, above the Bank of England's target of 2%.
Unemployment is estimated to have increased by about 900,000 during the recession, which is considerably less than in previous recessions. In July 2010 the official figures were 7.8% of the workforce totalling some 2.47 million people.
The British government intervened robustly to limit the crisis, initiating a range of policies that were taken up by many other countries. Gordon Brown basked in this glory for a few months, famously stating that he had saved the world in a slip of the tongue during a debate in the House of Commons. There were a number of strands to the state’s intervention:
- cuts in the Bank of England base interest rate. Between December 2007 and March 2009 the rate was progressively cut from 5.5% to 0.5%, bringing it down to the lowest rate on record and below the rate of inflation;
- intervention to directly support the banks, leading to nationalisation or part nationalisation. This started with Northern Rock in February 2008 and was followed by Bradford and Bingley. In September the government brokered the take-over of HBOS by Lloyds TSB. In October £50bn was made available to the banks for recapitalisation. In November 2009 a further £37bn investment resulted in the de-facto nationalisation of RBS/Nat West and the partial nationalisation of Lloyds TSB/HBOS;
- quantitative easing, also known as the asset purchase facility. In March 2009 plans to inject £75bn over three months were announced. This was gradually increased and at present the total stands at £200bn. The Bank of England explains that the purpose of quantitative easing is to put more money into the economy to keep the rate of inflation at its target of 2% and this became necessary when further reductions of the base rate were no longer possible after it had been reduced to 0.5%. This is achieved by the bank purchasing assets (mainly gilts) from private sector institutions and crediting the sellers’ account, effectively creating new money. This sounds simple, but according to the Financial Times “No one is sure whether or how quantitative easing and other unorthodox monetary policies works”
- intervention to encourage consumption. In January 2009 VAT was cut from 17.5% to 15% and in May 2009 the car scrappage scheme was introduced. The increase in the guarantee on bank deposits to £50,000 in October 2008 can be seen as part of this since its aim was to reassure consumers that their money would not just disappear in the event of a bank collapse.
The result was the containment of the immediate crisis with no further bank collapses. The price was a substantial increase in debt as noted above. Official figures give the cost of government intervention as £99.8bn in 2007, £121.5bn in 2009 and £113.2bn in July this year. These figures do not include the cost of purchasing assets such as the stakes in the banks or the expenditure on quantitative easing (which would add another £250bn or so to the total) on the grounds that these assets will only be held temporally by government before being sold back. Whether this is so remains to be seen, although Lloyds TSB has paid back some of the money it received.
The interventions have also been partly credited for the lower than expected rise in employment during the recession. This will be dealt with in more detail below.
However, the longer-term prospects seem more questionable:
- interventions to manage inflation and theoretically encourage spending have not brought the headline rate to target, although it is suggested that the underlying trends are lower than the headline rate suggests. However, the cost of food is rising globally so may affect the rate over time, particularly as it affects those who are less well off;
- the efforts to inject liquidity into the system, by reducing the cost of borrowing and increasing the supply of money, have not produced the increase in lending that was hoped for, leading to repeated calls from politicians for the banks to do more;
- the impact of the VAT cut and car scrappage scheme contributed to the initial recovery at the end of 2009 but have now ended. There was a slight fall in car sales in the first quarter of 2010 but the car scrappage scheme was still in place then. Overall, there have been reductions in most areas of household consumption, growth in personal debt has begun to reduce and the rate of savings has increased. Given the central role played by debt-funded household consumption in the boom this clearly has implications for any recovery.
The consensus forecasts for GDP growth in 2010 and 2011 in Britain are 1.5% and 2.0% respectively. This is above the 0.9% and 1.7% predicted for the Euro Area but below the 1.9% and 2.5% forecast for the OECD as a whole and below the forecasts for Europe from the IMF quoted at the start of this report.
However, to grasp the real significance of the crisis it is necessary to penetrate below these surface phenomena to examine aspects of the structure and functioning of the British economy.
Historical and structural issues
Changes within the composition of the British economy: from production to services
Source: Economic and Labour Market Review
The rise of the financial sector
The weight of the banking sector within the economy can be gauged by comparing its assets to the total GDP for the country. This can be seen in the chart above. By 2006 British banks’ assets were over 500% of national GDP. In the US assets rose from 20% to 100% of GDP over the same period, thus the weight of the banking sector in Britain is proportionately far greater. However, its capital ratio (this is the capital held by the bank in comparison to that lent) did not keep pace, falling from 15-25% at the start of the 20th century to about 5% at the end. This increased sharply over the last decade and just before the crash leverage of the major global banks was about 50 times equity. This underlines that the global economy has been built on a tower of fictitious capital over the last few decades. The crisis of 2007 threatened to topple the whole edifice and this could have been catastrophic for Britain given its reliance on this sector. This is why the British bourgeoisie had to respond as it did.
The nature of the service sector
What hope for an economic recovery?
The global context
The options for British capitalism
The impact of the crisis on the working class