UK recession starts to bite
NO SOONER had the government pumped in £37 billion
to bail out the banks than another more devastating crisis started to
unfold. Friday, October 10, saw the FTSE 100 stock exchange index lose
more than 7% of its value – the fifth biggest percentage fall in history
– as figures revealing increasing unemployment confirmed the inevitable
recession now hitting Britain. The credit crunch which threatened the
very existence of major banks has now hit the real economy. Mervyn King,
governor of the Bank of England, has confirmed what everyone expected
and announced that the economy is now in recession. He added that it
would be as bad as the recessions in the early 1980s or early 1990s.
Jobs, homes, pensions and public services are all at risk.
According to the Office for National Statistics, the
number of those without work who are claiming benefits grew by 164,000
between June and August, with 100,000 workers signing on in August
alone. If those out of work but not claiming Job Seekers Allowance are
included, then unemployment is 1.8 million, with projections of two
million by Christmas. This adds up to the fastest rise since the
recession in the early 1990s. The number of young people who are jobless
is increasing but, because school leavers who cannot get jobs are not
entitled to claim unemployment benefits, they are not included in
unemployment statistics.
Job losses are concentrated in retail, catering,
hotel work, manufacturing, financial services and construction – most of
which serve the financial and housing market and areas which
hard-strapped consumers see as non-essential spending. Half the job
losses between June and August have occurred in London and the South
East, where much work is dependent on the financial sector and services
following the destruction of manufacturing industry. A further 120,000
workers in London will lose their jobs in the next 18 months. Reflecting
the domination of the service sector 23% are in the retail or leisure
sector. Middle-class professions, such as solicitors and architects, are
already suffering job losses.
But areas such as the North East and North West,
which are still suffering from the manufacturing cull in the 1980s, are
starting out in this recession with already high levels of unemployment
and poverty. Three areas in Birmingham have unemployment rates ranging
from 12% to 19.3%. Car factories across the country are already on
short-time working as sales decline across the world.
Britain will be especially badly hit from this
recession as the British capitalist class, backed by Tory and Labour
governments, has relied on the banking and financial sector, alongside
the housing and credit booms, to provide it with huge profits. Because
pension funds are invested in the markets these too will be affected by
the crisis in the financial sector. The value of ‘defined contribution
pensions’ (where there is no guaranteed level of payouts) has slumped by
between 20% and 40% already. Unless these schemes are topped up by
employers, many workers will be facing a poorer retirement than
anticipated.
Rising unemployment will have severe consequences
for many areas of the economy. Many who lose their jobs will join the
thousands who have already had their homes repossessed (up 19,000
between January and June), unable to meet their mortgage payments. Two
million people could suffer negative equity (when the value of a home
falls below the mortgage on the property). Unlike the recessions in the
1980s and 1990s, there is even less social housing now for those who
lose their homes. Even with lower house prices it is near impossible to
get a mortgage as banks are still reluctant to lend or even pass on the
full benefit of the recent cut in the base rate. The Northern Rock bank,
nationalised by the government, has been particularly severe on
homeowners struggling with mortgage payments. It is responsible for 21%
of all homes repossessed in the first half of this year, revealing that
the sort of nationalisation the government has implemented is not in the
interests of ordinary people. Government ministers call for mortgage
lenders to use repossessions ‘as a last resort’ by negotiating lower
mortgage payments and breaks, but are facing opposition from the banks.
Much criticism has been targeted at ordinary workers
who have taken out loans or credit secured on their homes. But, during
the boom years for capitalism, profits expanded while workers’ wages
were held down. Average earnings grew by just 3.4% in August, the lowest
figure for five years, and well below inflation. Many public-sector
workers have been offered even less, often tied to three-year deals. No
wonder that many workers took advantage of the equity in their homes and
easy credit to take a holiday, improve their home, or help their
children get somewhere to live or a university education, as most wages
could not cover such expenditure.
Loans and credit cards are now costing a lot more
with the average APR on credit card purchases rising to 17.46% and a
£5,000 personal loan costing 15.3% interest (up from 8.6%). Almost five
million applications for new credit cards or personal loans were
rejected in the last six months.
There is talk of the government using Keynesian
measures to inject money into the public sector to slow down
unemployment and limit the severity of the recession. But recent figures
show that public-sector borrowing is already high: £37.6 billion in the
second quarter – the highest nominal amount since records began in 1946.
A recession will lead to lower tax receipts and higher spending on
welfare benefits. Private Finance Initiative projects – New Labour’s
flagship to build schools and hospitals using the private sector – are
suffering already as loans become more difficult to get. Brown’s pledge
when chancellor that public debt should be no more than 40% of gross
domestic product (GDP) has now been breeched, with the government
bail-out of Northern Rock alone taking it to over 43%.
Inevitably, there will be more cuts in the interest
rate following the 0.5% cut last month bringing it down to 4.5%,
possibly dropping to 2.5% next year. This is in recognition that
inflation is not the issue at the moment. Oil prices have halved to $70
a barrel and other commodity prices will also fall due to less demand
(although energy companies, in particular, are resisting passing price
reductions onto ordinary consumers).
Brown’s Keynesian announcement that the government
would spend its way through a recession does not seem so grand close up.
It seems unlikely that the chancellor, Alistair Darling, will pump any
new money into the economy and, instead, will only bring forward capital
expenditure on projects already agreed. The outlook after 2010 (after
the election) will be serious cuts in public spending. The support from
Lord Mandelson, the new business secretary, for the partial
privatisation of Royal Mail will lead to job losses and a worse service
– the Communications Workers’ Union should remind the government of its
conference decision to pull Labour Party funding if any privatisation is
proposed.
There is even talk of raiding surpluses from public
services, such as the £3 billion ‘surplus’ in the NHS! Government
departments – such as Work and Pensions and Revenue and Customs – are
facing cuts now which will include further job losses. Local government
jobs and services are already being squeezed and many councils will be
badly hit from their investments in the crisis-ridden Icelandic banking
system.
So, while banks get bailed out at the cost of
billions and are still resisting regulation, and one in four big
companies pay no corporation tax, there is no announcement of new money
for public services at this stage. Nonetheless, it cannot be ruled out
that, as the recession unfolds, the government may decide to borrow and
spend more than it is committing itself to at the moment.
The Ernst and Young Item Club economists predict
that the economy will retract for a further three quarters, with a weak
recovery in 2010. While this would be bad enough and bring severe
hardship for many, a longer recession cannot be ruled out. Even when the
economy stops declining, a period of zero growth would not allow
production and consumption to pick up.
Whichever tactics the government choose to
implement, a painful recession cannot be avoided as recessions and
depressions are consequences of a capitalist economy. Working-class
people are already angry about rich bankers and financiers getting
bailed out while they face the prospect of harder times ahead. A layer
is questioning the capitalist system itself and showing an ever-greater
interest in a socialist alternative.
Jane James
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