British economy: safe as houses
RECENT INDICATORS have not shed an optimistic light on the
British economy, leading to discussions on the financial pages about the
possibility of troubled times ahead. Consumer spending has fallen, manufacturing
output is down, the housing market and credit card lending are slowing.
Normally, such economic signs would encourage a fall in
interest rates with the aim of correcting the economic gloom. Yet the Bank of
England’s monetary policy committee in June decided to freeze interest rates for
another month, the tenth time in a row (though two members voted for a 0.25%
cut). Do they believe that the economy is just going through a difficult few
months and that we are a long way off from a recession?
Mervyn King, Governor of the Bank of England, has warned of
inflationary trends within the economy which would counteract the need for rates
to drop. There has been an increase in the growth of ‘money supply’ (the amount
of money in the economy) and rising import costs, along with rising labour costs
as the inflow of workers from Eastern Europe slows down. Prices of food and
alcoholic drinks have risen and oil prices seem to be rising once again.
The first indication of problems with consumer demand was
manifested at Christmas when we failed to spend as much money on the festive
season as usual. Retail sales are down 2.4 % from 2003 and sales growth has more
than halved in the past twelve months. The British Retail Consortium did not
hesitate in calling for an interest rate cut, describing the situation as a
‘consumer-led recession’. Not only clothes but sales of larger items are
affected. The analyst group, Verdict, predicts 150,000 job losses in the retail
sector over the next five years.
Another section calling for lower interest rates is the
building industry which is expecting lay-offs in construction and estate agents.
Despite a small recovery at the start of the year, the housing market has begun
to slow down. Mortgage approvals are 20% less than last year with signs they
will stay in the doldrums.
Following a period of a slowdown in house price growth,
prices now seem to be falling due to a rising number of properties for sale.
Nationwide building society predicts that house-price inflation for 2005 will be
the lowest for ten years. Consequently, the number of new homes being built has
fallen 5% in the first quarter of this year. While some analysts doubt that a
sustained fall in house prices has set in, most believe that the housing market
is heading for either a soft landing or a housing crash more akin to the 1990s.
The very engines of the consumer boom are now running out of
steam. New credit card borrowing is falling and we could be close to large debt
default. Barclaycard admits greater difficulty in collecting arrears with more
people failing to repay even the monthly minimum. Debt advisers are predicting
that more people will suffer debt problems over the next six to twelve months.
Home repossessions are also increasing.
Manufacturing is in no position to take over from consumer
spending to give the economy a boost. Manufacturing and engineering in Britain
are going through their weakest performance for two years according to second
quarter statistics, with output at the same level as 1997 and prices of
manufactured goods falling. The decrease in consumer spending, a rising pound
and falling growth in the eurozone – Britain’s largest export market – are
causing these problems. One reason that Blair is urging European governments to
liberalise their economies further is the hope it would lift the EU out of low
growth and consequently import more (British) goods.
The Economist admits that "only one engine of demand is
humming… government expenditure". But Brown’s growth predictions of 3-3.5% this
year may not be realised, leading to less income from taxation. House sales are
forecast to drop by 300,000 this year which would reduce Treasury stamp duty
receipts by £1bn. The ‘golden rule’ that over an economic cycle the government
cannot borrow to cover current spending is also looking dodgy as the gap grows
between government income and expenditure.
One of Brown’s key fiscal ‘rules’ is that public sector
borrowing (net debt) cannot rise above 40% of GDP. Borrowing may already be near
this limit, although Brown claims it is 35%. The chief UK economist at Morgan
Stanley is urging Brown to raise the limit to above 40% or discard his rule
altogether: "To have to cut back on investment when there exists a substantial
backlog of required capital spending on schools, hospitals and transport
infrastructure would be extremely unfortunate". The private market for NHS
clinical services is expected to reach £2bn by 2007, while the capital value of
private finance institute hospitals (both existing and under construction) has
reached £5bn.
There is no doubt that many capitalists are keen for
government spending to continue at this rate in order to line their pockets
further from privatisation and also prolong the boost to the economy that
government spending provides, particularly when other sections of the economy
are so weak. Of course, this would only postpone a major crisis if the
underlying state of the economy continued to suffer.
But Britain is not an economic island and will be buffeted
by the growing problems of the world economy. The US trade and federal budget
deficits and the stagnation of the US housing market, alongside protectionism,
could trigger a recession that would affect economies across the world. Some
economists talk of the possibility of ‘stagflation’, stagnant growth with high
inflation, while others see deflation (falling prices and demand) as another
scenario.
While industrialists and bankers worry, it is ordinary
workers who will pay the ultimate price for a slowdown or economic recession
with job losses and cuts in public services. Economic trends seem to be pointing
to a slowdown in the British economy, rather than a temporary blip in growth,
but this will be clearer in coming months as developments in the British and
world economy unfold.
Jane James
|