|SocialismToday Socialist Party magazine|
British economy: safe as houses
RECENT INDICATORS have not shed an optimistic light on the British economy, leading to discussions on the financial pages about the possibility of troubled times ahead. Consumer spending has fallen, manufacturing output is down, the housing market and credit card lending are slowing.
Normally, such economic signs would encourage a fall in interest rates with the aim of correcting the economic gloom. Yet the Bank of England’s monetary policy committee in June decided to freeze interest rates for another month, the tenth time in a row (though two members voted for a 0.25% cut). Do they believe that the economy is just going through a difficult few months and that we are a long way off from a recession?
Mervyn King, Governor of the Bank of England, has warned of inflationary trends within the economy which would counteract the need for rates to drop. There has been an increase in the growth of ‘money supply’ (the amount of money in the economy) and rising import costs, along with rising labour costs as the inflow of workers from Eastern Europe slows down. Prices of food and alcoholic drinks have risen and oil prices seem to be rising once again.
The first indication of problems with consumer demand was manifested at Christmas when we failed to spend as much money on the festive season as usual. Retail sales are down 2.4 % from 2003 and sales growth has more than halved in the past twelve months. The British Retail Consortium did not hesitate in calling for an interest rate cut, describing the situation as a ‘consumer-led recession’. Not only clothes but sales of larger items are affected. The analyst group, Verdict, predicts 150,000 job losses in the retail sector over the next five years.
Another section calling for lower interest rates is the building industry which is expecting lay-offs in construction and estate agents. Despite a small recovery at the start of the year, the housing market has begun to slow down. Mortgage approvals are 20% less than last year with signs they will stay in the doldrums.
Following a period of a slowdown in house price growth, prices now seem to be falling due to a rising number of properties for sale. Nationwide building society predicts that house-price inflation for 2005 will be the lowest for ten years. Consequently, the number of new homes being built has fallen 5% in the first quarter of this year. While some analysts doubt that a sustained fall in house prices has set in, most believe that the housing market is heading for either a soft landing or a housing crash more akin to the 1990s.
The very engines of the consumer boom are now running out of steam. New credit card borrowing is falling and we could be close to large debt default. Barclaycard admits greater difficulty in collecting arrears with more people failing to repay even the monthly minimum. Debt advisers are predicting that more people will suffer debt problems over the next six to twelve months. Home repossessions are also increasing.
Manufacturing is in no position to take over from consumer spending to give the economy a boost. Manufacturing and engineering in Britain are going through their weakest performance for two years according to second quarter statistics, with output at the same level as 1997 and prices of manufactured goods falling. The decrease in consumer spending, a rising pound and falling growth in the eurozone – Britain’s largest export market – are causing these problems. One reason that Blair is urging European governments to liberalise their economies further is the hope it would lift the EU out of low growth and consequently import more (British) goods.
The Economist admits that "only one engine of demand is humming… government expenditure". But Brown’s growth predictions of 3-3.5% this year may not be realised, leading to less income from taxation. House sales are forecast to drop by 300,000 this year which would reduce Treasury stamp duty receipts by £1bn. The ‘golden rule’ that over an economic cycle the government cannot borrow to cover current spending is also looking dodgy as the gap grows between government income and expenditure.
One of Brown’s key fiscal ‘rules’ is that public sector borrowing (net debt) cannot rise above 40% of GDP. Borrowing may already be near this limit, although Brown claims it is 35%. The chief UK economist at Morgan Stanley is urging Brown to raise the limit to above 40% or discard his rule altogether: "To have to cut back on investment when there exists a substantial backlog of required capital spending on schools, hospitals and transport infrastructure would be extremely unfortunate". The private market for NHS clinical services is expected to reach £2bn by 2007, while the capital value of private finance institute hospitals (both existing and under construction) has reached £5bn.
There is no doubt that many capitalists are keen for government spending to continue at this rate in order to line their pockets further from privatisation and also prolong the boost to the economy that government spending provides, particularly when other sections of the economy are so weak. Of course, this would only postpone a major crisis if the underlying state of the economy continued to suffer.
But Britain is not an economic island and will be buffeted by the growing problems of the world economy. The US trade and federal budget deficits and the stagnation of the US housing market, alongside protectionism, could trigger a recession that would affect economies across the world. Some economists talk of the possibility of ‘stagflation’, stagnant growth with high inflation, while others see deflation (falling prices and demand) as another scenario.
While industrialists and bankers worry, it is ordinary workers who will pay the ultimate price for a slowdown or economic recession with job losses and cuts in public services. Economic trends seem to be pointing to a slowdown in the British economy, rather than a temporary blip in growth, but this will be clearer in coming months as developments in the British and world economy unfold.