22.06.2017
Capital in disarray
The UK economy is set to enter a period of recession, argues Michael Roberts
The fact that there is now a hung parliament puts the Brexit talks with the European Union in a mess, as there is no “strong and stable” government to negotiate with. But this is more than a disaster for May and the Conservatives: it is one for the British ruling class.
The negotiations over the terms of Brexit started on June 19 and the EU will face British negotiators who have lost their majority in parliament. The terms of any deal are going to be hard on the interests of British capital: on the terms of trade, employment mobility and on capital flows for the City of London.
At the same time, the UK economy is already struggling. In the first quarter of 2017, the UK’s real GDP grew more slowly than any other top (G7) economy. The British pound dropped sharply after the election result and it is likely to fall further, as foreign investors consider their options, given the uncertainty of what will happen with Brexit and the paralysed position of a minority Conservative government unable to carry out any economic policy measures.
Sterling has already fallen by over 15% since the Brexit referendum result last year. That has led to substantial rise in prices in the shops from higher import prices. Inflation is likely to rise further, driving down real incomes for the average British household. And that is after British households have suffered the longest stagnation in real incomes in the last 166 years!
The UK trade deficit with the rest of the world keeps widening, as British exporters fail to take advantage of a weaker pound and import prices rise. The reason that British capital is not gaining from the devaluation of the currency is that British manufacturing and services are still not competitive, because productivity growth is virtually zero.
It is nine years since the start of the global financial crash in 2008. Since then, real GDP per person in the major economies has risen on average at less than 1% a year - well below the trend average before the global crash. Germany has done best, with a cumulative rise of 8.7%, even better than the ‘lucky country’, Australia (6.8%). But the UK has managed just 2% over nine years!
The main reason is the sharp fallback in the growth of the productivity of labour. The UK economy has depended instead for its (limited) growth since the end of the great recession on a consumer boom and a big increase in immigration of young people from eastern Europe and the EU. According to the most recent Office for National Statistics figures, there has been no increase in the number of UK-born in employment over the last year. All the net increase in employment has been due to those born abroad. If the Brexit negotiations go according to May’s stated intentions and the free movement of labour is lost, British business is going to have to rely on domestic labour and skills. Employment growth will slow and national output will falter, unless productivity rises.
And the main reason why productivity will not rise is the failure of British businesses to invest in productive capital: ie, new machinery, plant and computer software. Business investment has hardly risen since the great recession, even as profitability recovered.
That is because profits were concentrated in the large companies, while the small and medium-sized companies made little and could not get credit.1 The large companies (mainly tech and finance) returned their profits to shareholders in dividends and share buybacks or held cash abroad in tax havens, rather than invest. And business profitability in the UK started to fall back even before the Brexit vote.
All this means that the UK economy is set to enter a period of stagnation at best. The Organisation for Economic Cooperation and Development’s economists are already forecasting that the UK economy will slow down to just 1% next year, as Brexit bites. And there is every likelihood of a new global recession in the next year or two.
After the 2015 election which the Conservatives won narrowly, I argued that the victory was a poisoned chalice and the Tories would not win the next election.2 I said that because of the likely global recession before 2020. But Brexit cut across all that for a while. This result was partly a follow-up from Brexit, as the Conservatives did better in the areas that voted to leave the EU and Labour did better in those that voted to stay in. But now the election also brought back the issue of living standards of the many against the wealth of the few. That led to May’s failure.
This minority Conservative government is going to find it difficult to survive for long. There could well be a new general election before the year is out and that could well lead to a Labour government aiming to reverse the neoliberal policies of the last 30 years. But if the UK capitalist economy is in dire straits, a Labour government will face an immediate challenge to the implementation of its policies.
Michael Roberts blogs at https://thenextrecession.wordpress.com.
Notes
1. See https://thenextrecession.wordpress.com/2017/01/23/beware-the-zombies.
2. https://thenextrecession.wordpress.com/2015/05/08/uk-election-a-poisoned-chalice.