You can’t have missed the headlines. The UK economy has returned to growth so we can all sigh with relief. Those doomsayers like us in Steady State Manchester who suggested that the motor was broken are wrong….
Let’s take a closer look.
Luckily some other critics have started the job of unpicking the ‘recovery’, so we’ll start from there. And hold onto the thought that maybe growth isn’t what we should be after anyway as we’ll come back to that.
1) Investment isn’t happening.
“Investment by firms is the life-blood of the economy. Without it, employment begins to dry up. Old machines must be replaced; new buildings opened; new technology developed. Spending by firms creates employment today, since it sustains demand, and paves the way for employment tomorrow.”
Well we could question some of that because investment tends to shift production towards less labour-intensive ways of making things. But given that we aren’t making much in this country any more, we’ll go with James’s argument (also made this week by the orthodox Oxford Economics crew who produce Greater Manchester’s ‘New Economy’ (sic) forecasting model).
What’s happening though is that companies have been reluctant to invest since the crash. They’ve continued to accumulate – to make profits, but capital is footloose (and enjoys a barrier-free world): money will be invested, not in local production but in those areas where the best combination of asset protection and return can be found. And that will be in things like financial instruments, property speculation, and rising equities in overseas boom (aka bubble) economies. At present, what is counted as ‘investment’ is only 19% related to productive capacity – and 62% is on buildings (that’s property gambling) – figures from John Ashcroft’s presentation to the annual New Economy seminar on 4 December.
2) Much of the growth in GDP is based, as before, on consumer debt.
James Meadway is spot on here so we’ll quote him:
“Rather than a recovery driven by business investment, household spending is largely responsible for our rising GDP. Household spending, as a share of all spending, has increased from 46.2% in 2011 to 46.9% today.
“This is worrying because, as we know, average real earnings have fallen sharply. So the only way to explain the increase in household spending (given the decrease in household earnings) is that households must, in aggregate, be running down their savings, and borrowing more.
“And this is precisely what the data shows. Household savings are falling at their fast rate in forty years. After falling since the crash, unsecured lending – borrowing on credit cards and so on – has picked up consistently over the last year.”
Remember that GDP is calculated by adding together income and expenditure in the economy (in a mysterious way – it isn’t actually something that exists like the price of bread, or the concentration of carbon dioxide in the atmosphere). So when we see it going up, we have to ask what is going up. And the answer seems to be overwhelmingly on Britain’s favourite pastime – shopping. A phantom recovery indeed.
3) ‘Recovery is dependent on the housing market’.
James finally draws attention to the role of housing prices in the bubble/recovery. The crucial figures here are a) the housing debt to income ratio (given wages are not rising, but on average, reducing), and b) actual house prices. We aren’t back to the levels in 2008, when the ratio of housing debt to disposable income was around 7 (for the UK, and 6 here in the NW).
House prices, similarly are still some way below the peak, except in London where they are some 15% above the 2008 peak, on average. And this is the problem: as James puts it:
“This doesn’t mean a crash is imminent. With interest rates low and, for now, no disruption in financial markets that would be unlikely. The problem is that economic growth in the UK is now hugely dependent on London’s inflating property prices, and it’s likely the bubble could spread. If so, property markets will become increasingly risky and sensitive to a crash, and economic growth driven by borrowing will reappear. Fears of this bubble are the main reason the Bank of England, in defiance of the Treasury, has been trying to restrict mortgage lending.”
There are other problems too.
4) The Trade Gap.
There are fashions in economics. Today GDP is the holy grail – the key figure to watch and to aim for. But before that it was the money supply, and from time to time, inflation. Back in the 1960s the big concern was the country’s balance of payments – the ‘Trade Gap’. In his presentation at the New Economy seminar, John Ashcroft economist at GM Chamber of Commerce, showed an astonishing graph of just this (see slide no 21 here). The gap has been steadily increasing from the early 1980s (which showed a small surplus) until now when it is £110 Bn per year. That is offset by the export of services (no we don’t really know what), leaving a net gap of around £30Bn.
The point is that this exposes the nature of the ‘recovery’. Despite some growth in manufacturing – and here the North West is relatively strong, the government’s now abandoned fantasy of an export-led recovery is exposed as fantasy. And it also exposes, in case we hadn’t realised it, the very dependent nature of the UK economy. That isn’t dependency in the sense of post-colonial economies, but dependency on supplies from overseas. And put this together with the weak pound, you can see (in Ashcroft’s argument again) that British manufacturing is stymied, since to produce it has to import most things, from primary materials, to machines and supplies, to fuel. That said it is contributing to jobs growth in the North West.
One of the surprises has been the relatively small impact of the recession on employment. That is to say the numbers of people unemployed have not increased so much as expected, and there has lately been a decrease. But that decrease has been a result of increases in pat time working and the use of zero hours contracts. Average earnings have fallen. This is part of the reason for the increasing levels of household debt. Job growth has been in the insecure, poorly paid jobs – although even in a recession there is also the creation of some new, good quality jobs.
The British economy is increasingly one with large low-wage sectors, and overall levels of income inequality that continue to rise. That’s a policy choice (even when a result of laissez faire policy) – as other parts of Northern Europe have shown, it doesn’t have to be like that. And let’s be heretic and question whether a strategy based on jobs for all is actually what’s needed (see the final remarks below).
Let’s summarise briefly.
The ‘recovery’ of GDP growth is based on a return to the old ways of consumer credit-based consumption and house price inflation. Companies are extracting profits, but they aren’t investing in rebuilding the UK’s broken economy, which remains dependent on, or rather in hock to overseas exporters.
6) The Steady State perspective on this
So far, we’ve been concerned mainly to show that there isn’t anything like a real recovery and we’ve used information from both critical and orthodox commentators to help build the argument. But what all these commentators have in common is the assumption that we need to keep growing the economy. For some of them (e.g. Anthony Light of Oxford Economics) there seems to be little concern if this recovery is based on consumption. That’s even the case for the Resolution Foundation. That’s (a big part of) Keynesianism though – stimulating demand demand brings ‘prosperity’ for all. We can still see that idea in the output of the otherwise helpful Green New Deal Group.
We take a radically different approach.
We can’t get away from the understanding that you just can’t grow an economy for ever. However that growth is made up, it inevitably means more material throughput, more depletion of resources like phosphorous and copper, and non-resources (like biodiversity, nature, wilderness, air and sea, peace and quiet) and more pollution – more emissions, – nitrogen oxides, carbon dioxide, methane, heavy metals. We do acknowledge the relevance of the ‘bioregional multiplier’ whereby money spent in a local economy remains in that economy but it is fundamentally important what that money is spent on, and that’s why we also emphasise the cultural and community dimension.
We also see the need to rebuild the broken British and regional economy to safeguard a true prosperity for all. We came up with some ideas for that in In Place of Growth and we’ve gained further insights from our friends at CRESC and their notion of the Foundational Economy (for one, eponymous, illustration of this ‘bread and butter’ economy, bread-making employs more people than any other area of manufacturing in Greater Manchester – see Neil Gibson’s presentation, slide 25 ), but we need to go further, recognising that there is a fundamental structural crisis of employment, in which jobs alone cannot be the answer, as André Gorz argued more than thirty years ago. We need to put all that, and more, together building up a model and case for the viable economy, viable simultaneously on ecological, social and economic grounds. And that needs a political strategy as an integral part of it. That’s what we’ll be doing over the next few months. Let us know if you’ve ideas to contribute.
And finally, here is a useful detailed analysis that came in later (6th January 2014) from Jeremy Smith of Prime Economics who makes most of the above points and some more besides, with supporting data.