A Close Look at the UK “Recovery”
Policies of fiscal austerity have brought deprivation and despair to millions of people in Europe, not least in Britain. In my recent book, Economics of the 1%, I explain in simple, straight-forward language why the arguments for austerity are nonsense.
The austerity arguments provide cover for a neoliberal programme to drive down wages, weaken unions and dismantle our entire system of social protection.
Yet the Coalition government has been extraordinarily successful in convincing people that fiscal cuts were necessary, and that they have led to a recovery of the economy. The mainstream media reports that it is quite likely that the national income of the United Kingdom, “gross national product” (GDP), has probably returned this month to its previous peak level, reached in 2008. Simple arithmetic shows that is six years to get back to where we were, the slowest recovery on record.
Still, the economy is back and we need to understand why and how. GDP is far from the best indicator of either recession or recovery. The chart below includes the number employed (those 16 years or older), along with GDP. Both are measured as percentage point differences from the first quarter of 2008. A casual glance at the diagram suggests that something unusual is in process. While GDP is only fractionally above its 2008Q1 level, employment is up a full three percentage points (unless otherwise indicated, statistics are from the Office of National Statistics, Economic Review June 2014).
To draw the obvious inference you need not be an economist (indeed, probably easier if you are not). Output per worker hour today is over four percentage points lower than it was in 2008 (GDP/HW in the chart). Why should productivity fall as an economy recovers? The favourite neoliberal possibility, that the decline is the result of feckless public sector workers, can be dismissed. The statistics show roughly constant productivity in public services, where employment has fallen, but declining productivity in the private sector.
How does a private economy become less productive? First, private employers may cut back production, but cut back employment by less. Since private companies are not charitable institutions, this possibility has credibility only if part-time work grows relatively to full time work. The statistics support this. At the beginning of 2008 about 15% the part-time employed wanted to work more hours. At the beginning of this year the number doubled to over 30%.
A second possibility is that the growth of employment has been concentrated in low wage, low productivity activities. This is what the ONS statistics show, with the largest employment growth in services, and not high-wage financial services in the City. We find further support for this shift in statistics showing a decline in real wages (see the report, An Examination of Falling Real Wages 2010-2013). Much of this decline results from more workers in low pay sectors and fewer in decent payment jobs.
Gross National Product, Employment & GDP per hour worked, 2008-2014
(percentage point differences compared to first quarter 2008)
One consequence of declining productivity is a loss of international competitiveness. The next chart shows that clearly. The UK trade deficit for goods and services together stagnated during the recovery, fluctuating between minus 1.5% and minus 2.5% of GDP. Measured in constant prices, exports of goods at the beginning of 2014 were almost two percent below their level in 2011. Whatever nudged recovery, it was not exports.
The chart also shows that along with the poor export performance has gone a serious deterioration in the current account (trade and services balance plus net short term money flows). The June report from the ONS points out the consequences,
The UK current account – which has been consistently negative since the late 1990s – deteriorated markedly in the second half of 2013, with deficits of 5.6% and 5.4% of nominal GDP in Q3 2013 and Q4 2013 respectively. This deterioration was widely noted (Bank of England May Inflation Report) as it suggests that the UK is becoming increasingly dependent on inflows of foreign capital to fund its current account. (ONS, Economic Report June 2014)
Balance of Payments: Current account & trade balance as share of GDP, 2008-2014
(percentages of GDP)
“Becoming increasingly dependent” on capital inflow means that the UK private sector is accumulating debt in foreign currencies. The optimists argue that if the accumulated debt finances investment it is a benefit not a problem. The next chart shows this is a false hope. Compared to the beginning of 2008, private investment in the UK economy now is 17 percentage points lower.
A recovery with investment far below six years ago for the same level of GDP — what does that imply? One obvious result is low productivity, where we began.
Private Investment, percent point difference from first quarter of 2008
The UK recovery form the Great Recession can be summarized as follows:
1. the slowest on recovery;
2. burdened with falling productivity, probably due to a shift toward low wage, low skill, low productivity sectors based on part-time employment;
3. a weakening of export performance, due to stagnant productivity; and
4. dismally low private investment.
I suspect that the Chancellor George Osborne is celebrating that the economy is on the road to recovery with one of the highest growth rates among the G7 countries. Indeed, the UK does appear on a road, the low road to low wages, poverty and external vulnerability.