issue 60

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Britain's fragile economy

APPARENTLY IMMUNE from events in the rest of the world, the British economy continues to grow. Britain's finance minister, Gordon Brown, is predicting growth of 2.25-2.75% this year. This will surely prove to be wildly optimistic, yet Britain's economy grew faster than any other country in the G7 (the world's seven-richest economies) in the second quarter of this year. Last year, the economy grew 2.9% but the current growth rate is 1.2%.

'Consumer confidence' had been high, with a buoyant housing market, cheap credit and relatively high levels of employment, although the figures mask regional differences and a widening gulf between the haves and have-nots. Capitalist economists deal in balance sheets. But what kind of system uses terms like 'growth' while child poverty averages 32% in England? In the North-East, North-West and Merseyside it is 34%; in Yorkshire 36%; and in the richest city, London, it reaches 43%.

The Scottish economy is a disaster already happening. GDP growth in Scotland was 1.1%. Manufacturing employment has fallen from nearly 400,000 to under 300,000 from 1989-2000, according to the Office for National Statistics (ONS). 'Silicon Glen', which produces 61% of Scotland's exports, has been ravaged by the collapse of the US high-tech sector. When Motorola's Bathgate plant closed 3,100 jobs were lost.

Workers in Wales have been stunned by the loss of 3,000 steelworkers' jobs at Corus and cuts by electronics and automotive companies, with agriculture hit hard by foot-and-mouth. Having lagged behind GDP growth in Britain from 1997-99, that will be repeated from 2001-03.

Overall, the service sector continues to expand while manufacturing industry collapses: the oft-mentioned two-tier economy.

The attacks on the US pushed the Bank of England to cut interest rates, after the US Federal Reserve and European Central Bank (ECB), and along with every other G7 state. Much to the delight of big business, control over interest rates was handed to the Bank of England monetary policy committee (MPC) by New Labour - its first act on coming to power in 1997. The theory behind lowering interest rates is that it would encourage businesses to borrow more money to invest in manufacturing. But companies will only invest if they believe they will see adequate returns from that investment. On the other hand, when recession coincides with high personal indebtedness - as is happening now - people tend to attempt to reduce their debts rather than spend more.

The most fundamental point to make about the British economy is that its effects on the world are not decisive. Although it is the fourth- or fifth-largest economy, it is far behind the top three - the US, Japan and Germany. Britain is, however, a leading international finance centre. Representatives of the British ruling class sit at the top table at international meetings for historical reasons - Britain was a world power a long time ago and the legacy of that experience is limited political influence.

It is the world economy which influences Britain. At present, the world is heading for recession - for reasons we have detailed in previous issues of this magazine - dubbed a 'synchronised sinking' by The Economist magazine.

Concerted attempts to reboot the world economy on the back of a 'patriotic rebound' after 11 September have so far failed to lift the all-pervasive gloom. Larry Kramer of CBS Marketwatch wrote: "Buy stocks. Support every company you believe in. It's as close as you can get to feeling like you are pulling the trigger against our enemies". But the Financial Times article went on to ask: "Should British investors stand shoulder-to-shoulder with their American cousins in a show of patriotic force? Unless they want to fritter their assets away, analysts confess the answer must be 'no'." In the same issue, Martin Wolf confirmed: "In cutting interest rates by 0.5 percentage points on Monday, the Federal Reserve and the European Central Bank gave well-timed support to the global economy. Unfortunately, they are fighting to rescue a world economy already in recession. After the assault, the probability is of a still longer and deeper slowdown". (19 September)

Since Wall Street reopened on Monday 17 September, the markets have continued falling. The Dow Jones Industrial Index, which started the year at over 11,000 is now in the 8,000s. London's FTSE 100, having started around 6,500, has fallen to the mid-4,000s.

Boeing announced 30,000 job losses and AMR, the parent company of American Airlines, 20,000. British Airways is axing 6,000 jobs and Virgin Atlantic is cutting capacity by 20% and 1,200 jobs. This will lead to a fall in orders for new aircraft, impacting in 2003-04. The 40,000 Rolls Royce workers employed in Britain, especially at Bristol and Derby, will bear the brunt.

British economic growth is fragile. Manufacturing has been systematically decimated by successive governments for more than 20 years. Whereas the economy has recorded overall growth, manufacturing output fell by 3% last year.

In July, the number of redundancies exceeded the numbers hired by 1,500. A turning point. Up to then, manufacturing jobs - which are often more highly-skilled and higher paid - tended to be replaced by low-paid, less secure employment in the service sector. Today manufacturing accounts for 20% of GDP, but the service sector - two-thirds of the economy - relies on that manufacturing base.

An estimated 100,000 jobs have been lost this year. When Marconi collapsed, 10,000 jobs went internationally. Once a giant of British industry, its value fell from £34 billion a year ago to under £1 billion, its shares from £12.50 to 26.25p. Marconi's debt reached £4.4 billion, yet the ex-CEOs are still fighting for £2 million pay-offs.

Manufacturing output fell at its fastest rate in a decade in the second quarter of this year - down 0.9%. Telecoms equipment output halved, and the technology sector - electrical and optical equipment manufacturing - fell by more than 10%, the sharpest fall since records began 33 years ago. These represent the so-called 'new economy' which was supposed to end 'boom-and-bust' economic cycles.

The strength of the pound and the cut-throat, contracting market will put pressure on manufacturers' profits. Under the profit-driven capitalist system, that can only mean cutting back on investment, leading to job losses and attacks on wages and conditions. Economic recession invariably results in an onslaught by bosses and their representatives in establishment political parties and the media against working-class people. The only defence is determined, collective industrial action.

These conditions also strengthen the hand of the bosses of multinational companies, bolstered by New Labour's pro-big business agenda. When Nissan decided to stay in Sunderland to build the latest Micra model it was on condition that 65% of the components would be imported from eurozone economies to overcome the disadvantages of the strong pound. When the plant was originally built, Nissan promised that 70% of the parts would come from British manufacturers. BMW's recently opened engine plant in Birmingham plans to source 90% of its components from outside Britain.

Although retail sales are still high, this is running alongside the lowest consumer confidence in the economy since the global financial crisis in 1998. This mood is mirrored among service sector companies. The CBI's quarterly survey of accountants, management consultants and lawyers revealed that 56% were less optimistic than three months ago, with 6% more optimistic; 50% agreed that profitability would decrease, 15% that it would rise. (Financial Times, 3 September)

Britain's economy is fundamentally weak, resting on consumer confidence which could evaporate at any moment. HSBC's John Butler said: "A two-speed economy may not be ideal, but it is better than one-speed when that speed is reverse". (Observer, 5 August)

When the gears fail, the bosses and their cronies - the capitalist ruling class - will do all they can to ensure that workers pick up the bill. The problem, however, goes far deeper than the gearbox. And only the working class, armed with international, socialist tools, will be able to fix it.

Manny Thain