02.05.2012
Getting close to the edge
With the UK officially entering a double-dip recession and European voters turning against austerity, writes Eddie Ford, crisis is everywhere
Not exactly boosting the government’s May 3 election prospects, the Office for National Statistics released data on April 25 showing that the UK has entered a double-dip recession. The economy shrank by 0.2% in the first three months of 2012, following a contraction of 0.3% in the previous quarter - though it should be borne in mind that the April figure is an early estimate using 40% of the data gathered for later revisions and hence will be subject to at least two further revisions in the coming months. But it is almost guaranteed that any revised statistics will not paint a prettier picture of the UK economy.
Damningly for chancellor George Osborne, the ONS pointed out that the fall in government spending had contributed to the particularly large decline in the construction sector. A sentiment reaffirmed by Judy Lowe, deputy chairman for the Sector Skills Council and Industry Training Board (the national training organisation for construction in the UK), who stated that the “huge cuts” in public spending have “left a hole too big for other sectors to fill”.
Overall, the ONS concluded that the UK economy had been “flattish” in the past few quarters - fluctuating between quarters of extremely modest growth and then contraction. Previously, Sir Mervyn King, the Bank of England governor, had predicted that the economy would continue to “zigzag” this year, but even that has turned out to be a trifle too optimistic. Whatever the exact microeconomic details, any ‘upturn’ - if indeed we ever have one - will be very fleeting. Blink and it’s gone.
But there was more bad news for George Osborne on May 1 with a survey showing that manufacturing growth slowed to a virtual standstill last month. Markit’s Purchasing Managers Index (PMI) reveals that the UK manufacturing sector only just managed to keep above the 50 level which separates growth from contraction. Dangerously close to the edge. And there is no doubt that the still unfolding European crisis is damaging output in Britain, the data showing the sharpest fall in new export orders since May 2009. In a separate study by the accountancy firm Deloitte, 51% of people were “downbeat” about their household’s disposable income, up two percentage points from 49% in the previous quarter.
To further add to the gloom - where has the sun gone? - another report last week by the Ernst and Young Item Club said write-offs on corporate loans will increase to 1.9% from 1.6% in 2011. Insolvencies, we read, are “likely to rise more sharply in the north-east of England and Wales, where economic output is set to contract by 0.1% and 0.3% respectively”. If so, this will be the highest annual rate of write-offs since the mid-90s. And, obviously, the more loans banks have to write off, the less money they will have to lend. A classic credit squeeze, in other words.
All this has fuelled speculation that the Bank of England’s monetary policy committee (MPC) might after all launch another round of quantitative easing (QE). At its last meeting, the MPC appeared to back away from further purchases of government bonds to stimulate lending after nearing the end of its £325 billion bond purchasing programme. However, the MPC meets again next week and a majority could vote for a continuation, in one form or another, of QE.
Clearly, the UK economy is bumping painfully along the bottom and can you predict with reasonable certainty that it is set to do so for at least the next decade. Welcome to the stagnation years. But only a fool, or Tory chancellor, could have failed to see this coming. It was inevitable that implementing massive cuts during a period of increased unemployment and a general downturn in world trade would have such a result. The UK’s overall output was 4.3% lower in the first quarter of 2012 than it was in the first quarter of 2008, just before the recession started.
As a further sign of the times, the pound hit a two-year high against the euro - at one stage it bought more than €1.23 on the foreign exchanges. Yet the rise in sterling was not a vote of confidence in the UK economy, but rather a collective vote of no confidence in the euro zone. Cheaper foreign holidays, yes, but more expensive UK exports to Europe. The pound was also stronger too against the US dollar, thanks to last week’s weaker than expected US growth figures for the first three months of 2012 - that had slowed to an annualised pace of 2.2% in the first quarter of the year from 3% in the final three months of last year. Less, anyway, than the minimum of 2.5% growth that had been widely hoped for.
Confronted by such dispiriting economic data and trends, and absolutely no rational reason to think it will suddenly be thrown into reverse, we might get to enjoy in the relatively near future the phenomenon of a triple-dip recession. Maybe it is time to blow the dust off those texts books on economic history.
Catastrophic
Ed Miliband lost no time in denouncing the government for the “catastrophic economic policy” that had “landed the country back in recession”. Similarly, Ed Balls, the shadow chancellor, warned that the UK was in danger of entering a Japanese-style “lost decade”: ie, a period of slow or non-existent growth and high unemployment. He called upon the Tories to abandon austerity, given that the “consensus is changing” across Europe, with countries turning away from - or rebelling against - such policies.
Naturally, Cameron refuses to budge. Though the ONS figures were “very, very disappointing”, he said, it would be “absolute folly” to abandon the deficit-cutting programme - such a move would “jeopardise” the UK’s low interest rates. Almost the ultimate nightmare for Osborne, Cameron and the government. Instead, he pledged to “strain every sinew” and “redouble” the government’s efforts to “rebalance” the economy - which has been hit by euro zone shock waves. Upsetting some, Cameron bluntly told viewers of the BBC’s determinedly middle-brow Andrew Marr show that we are not “anywhere near halfway through” the euro zone crisis - it still has years to run. It is true that Europe’s economic and political crisis, far from abating, is developing more acute and explosive forms. Potentially, the whole euro zone project - a profoundly elitist, anti-democratic scheme from the onset - could bust apart, sending the entire global economy into a tailspin.
The evidence is everywhere. Figures released by Eurostat on May 2 showed that unemployment in the euro zone reached a new record high in March, when the jobless rate rose to 10.9% - the highest since the euro was formed in 1999. Inside the euro club, 17.4 million are now looking for work and more than three million of those are under 25. Italy’s unemployment rate has reached a 12-year high of 9.8%. Surprisingly, official figures revealed that the jobless rate in Germany rose to 6.8% in March - so the number of Germans now out of work stands at 2.87 million. For the whole of the European Union, including countries such as the UK and Denmark, which remain outside the euro, the jobless rate is 10.2%.
Additionally, Markit’s PMI score for the euro zone dropped to 45.9 in April from 47.7 in March - the lowest reading since June 2009. Easily on the wrong side of the 50.0 danger level. Most worryingly for the Euro-bourgeoisie, the rate of contraction in Germany was the fastest since April 2010. The German economic powerhouse is not beginning to look so mighty now.
Then, of course, we have the rapidly developing disaster that is the Spanish economy, which - to the use the words of foreign minister José Manuel García-Margallo - is facing a crisis of “huge proportions”. Latest official figures showed unemployment had climbed to 24.4%, or 5.6 million - 1930s-type levels, if not worse. Inevitably, the rate has soared on the back of ‘labour reforms’ that make it a lot easier and cheaper for the bosses to sack workers. Some 374,300 jobs were lost in the first three months of this year, representing an estimated reduction of €953 million in income tax receipts. In four of the autonomous regions the jobless rate is over 30% and across the country an appalling 52% of under-25s are out of work - leaving 1.72 million households without a single member in work. Despairingly, the Spanish employment minister, Engracia Hidalgo, said there were “no positive indicators” - whilst García-Margallo described the figures as “terrible for everyone and terrible for the government”. Never a truer word said.
If things were not bad enough for Spain, there are growing concerns that the country’s chronically ailing banking sector may need a €120 billion or so bailout before the end of the year. It is an open secret that Spanish banks have attempted to disguise billions of euros of bad debts on their books after a collapse in property price wiped more than 60% off the value of homes in some areas. Many families have somehow managed to maintain mortgage payments during the crisis, but a steep rise in unemployment has sent the number of bad loans soaring. No longer able to avoid the mess, the government is considering whether to create a holding company for the banks’ toxic real-estate assets after three rounds of forced clean-ups and consolidations in the financial sector failed to draw a line under the problem.
Making matters even worse - it never rains but it pours - the Standard and Poor’s ratings agency downgraded Spain’s credit status on April 29 - not to mention nine Spanish banks, including Santander and BBVA. The agency based its decision on the quite logical conviction that the situation was worsening. Rising defaults on loans and mortgages could quickly undermine the banking sector, for instance. S&P expects the Spanish economy at best to shrink by 1.5% this year and 0.5% in 2013. Spain’s rapidly deteriorating economy caused sharp falls on the Madrid stock exchange, while interest rates on 10-year sovereign bonds touched, once again, 6%. Fear of contagion stalks the markets. If Spain starts to topple, or finds it has to beg for a bailout, then Italy would surely start to buckle as well - effectively signally the end of the euro.
European spring?
No wonder that the more intelligent sections of the bourgeoisie are deeply worried. The current situation is obviously unsustainable politically and in that way poses a danger to the capitalist system as a whole. Therefore the Financial Times has been running a series of articles on the ‘crisis of democracy’: crucially, how on earth do you get people to vote for more austerity? Unless something serious is done, ‘austerity fatigue’ is bound to set in and we might even get the outbreak of a European spring - with the masses, and voters, rejecting all those parties and governments that are committed to deficit reduction and austerity.
Yes, initially that might take the form of voting for the nationalist right, as in France. But, equally, the left can benefit as well. The first round of the French presidential elections saw a significant revival of the Communist Party of France (PCF). ‘Official communist’ warts and all, the PCF is seen by an increasing number of people as an alternative to the austerity politics of Nicolas Sarkozy and the French bourgeois-capitalist establishment as a whole. François Hollande himself, the bookies’ clear favourite to win on May 6 after Marine Le Pen advised her Front National voters to abstain, has regularly used the slogan, “Say no to austerity” - promising to “rewrite” or “renegotiate” the new European fiscal pact, which institutionalises ‘book-balancing’ and ‘fiscal consolidation’. German chancellor Angela Merkel quickly retorted that the pact was not up for discussion or negotiation. Period. But now Dutch elections have been called for September after Mark Rutte’s government was unable to win parliamentary support for vicious austerity package - another rebellion?
On May 6 we have the Greek elections too - so it could possibly be Black Sunday for the European Central Bank, European Commission and International Monetary Fund troika and all those committed to the fiscal pact. The most recent opinion polls are fairly disastrous for New Democracy and Pasok, the two mainstream parties of right and left increasingly hated for their role in imposing austerity - and utter misery - on the masses. ND is on about 20% of the vote and Pasok has fallen from 44% in 2009 to about 15%. Despite the fact that the electoral system offers an outrageous, anti-democratic, 50-seat ‘bonus’ to the party with the most votes, it seems extremely likely that no single party will have a working majority in the next parliament.
Under these circumstances, The only way for Pasok and ND to continue implementing their austerity measures - as commanded, of course, by Berlin and Brussels - is for them to form another coalition government: but only if they can scrape together the requisite 151 seats between them. If there is still a bookies’ office open in Athens, go in and take a look at the odds - it will not look good for the governmental parties. But just remember that, taken as a whole, the anti-austerity vote is the largest, with the three left parties - Syriza (the Coalition of the Radical Left), the Communist Party of Greece (KKE) and the Democratic Left - jointly polling at about 40%.
As things stand now, therefore, the likelihood is that ND will come first on May 6 - thus securing the 50-seat ‘top-up’. Pasok will probably come second and the Syriza (the Coalition of the Radical Left) is expected to come third. Alexis Tsipras, Syrizia’s leader, has promised to “cancel” the austerity package and “negotiate” a debt reduction programme - placing growth and “EU reform” at the heart of the party’s programme/manifesto. He has also come out in favour of a coalition government constituted of left parties, supported by “popular mobilisation”.