Economic Pressure Mounts On Coalition

The Government is coming under increasing economic pressure. Data shows that in the crucial pre-Christmas shopping period, retail sales were disappointing.

As an indication of how bad, the Music and Book retailer HMV, has announced that it will be closing 60 stores, and there is talk about the need for it to discuss with its lenders. It is not alone. Data out today shows that things are deteriorating. The UK Services Purchasing Manager's Index has fallen to 49.7 - See Here. To understand how serious that is, any figure below 50 indicates contraction i.e. that the Services sector is heading back towards recession. Although, the Government has had a glimmer of light from the manufacturing sector in recent weeks as it has enjoyed improved orders and output, in Britain today it is dwarfed by the Service Sector. Manufacturing has benefited from the strong growth in other parts of the global economy, such that what is left of UK manufacturing tends to be in niche markets. It has also benefited from the competitive advantage on world markets obtained from a weakening pound.

But, most of Britain's trade is with the EU, and within that Ireland accounts for a lion's share.

Given that the austerity measures being implemented in Ireland are rapidly sending the Irish economy into a renewed recession, the potential for the UK to continue growing its manufacturing sector through exports is rapidly disappearing. Similar austerity measures are having a similar effect on other EU economies, particularly in the periphery. Only Germany is performing strongly in the EU, but it is also dependent upon exporting to other EU countries. Part of the counterpart of all that debt run up by Greece, Spain, Portugal and Ireland is to be found in the trade surplus of Germany. The austerity measures being pursued by some EU Governments is lunacy under current conditions as Joe Stiglitz, has pointed out in this interview with CNBC.

He has echoed some of the arguments I have made over the last year or so. CNBC write,

“As an alternative to austerity, Stiglitz suggested a program based on solidarity to stabilize the euro and a program based on the investments that will promote growth. The introduction of a euro-wide bond would be one of the elements needed to create the kind of solidarity necessary for the euro to succeed, he said.”


Stiglitz is not alone in his criticism of the austerity measures and Cuts programmes such as those being pursued by the Liberal-Tories. As Permanent Revolution said in a recent article,

“Since June Chancellor Osborne has been subject to a welter of criticism from within sections of the business class, academics, research bodies and pro-market journalists who are alarmed at the very real possibility that this scale of cuts will slump the economy just as an incipient recovery was under way by sucking billions worth of demand out of the economy.

In September even the OECD rowed back from its earlier advice in spring for the UK government to take a machete to public spending to close the deficit. It too can now see what lies ahead.”


But, it is now becoming clear from the data that it might be too late to avoid that double dip back into recession. As CNBC report, the Services PMI data is the worst for 20 months, taking it back to the situation almost at the height of the recession that erupted in the aftermath of the Financial Meltdown. In addition, economists are now expecting Fourth Quarter GDP to come in at just 0.4%, or about half the Third Quarter Figure. That decrease is an indication of how rapid is the slowdown. In fact, I would not be surprised to see Third Quarter GDP revised down again yet, and would also not be surprised to see Fourth Quarter GDP come in somewhere between flat and 0.2%. Even if the consensus figure is correct, it means that we are almost certainly heading for negative growth at the beginning of 2011, just on a trend basis. But, none of this reflects the fact that so far this dramatic slowdown is only a result of the Liberal-Tories talking the economy down for most of the year. It does not yet reflect the consequences of the Liberal-Tory Cuts programme, or of the tens of billions of pounds to be taken out of the economy in increased taxes from VAT, to Fuel and other duties, to National Insurance increases that they have been quick to impose on workers whilst giving employers a free ride.

As CNBC write,

“Large swathes of Britain's service sector suffered their first fall in output since April 2009 last month, a major survey showed on Thursday, pointing to a sharp slowdown in economic growth at the end of 2010.”


The PMI figure itself is a fall from the reading of 53 for November, that most economists expected to hold in December. That degree of slowdown, even allowing for the bad weather is an indication of just how quickly the Liberal-Tories policies are damaging the economy.

No wonder the only narrative Government Ministers can parrot is to continue to blame the last Government, and to recite their myth about the deficit. And a myth, of course, it is, because we know that the Liberal component of the Government were opposed to the Cuts agenda of the Tories, but were prepared to suck it up just as they ditched their other policies, in order to get their bums on the Government benches. We know that according to Liberal former Chief Secretary to the Treasury, David Laws, that the Liberals had held to that position even during the Coalition negotiations, and that they believed that the deficit had been “hyped up”.


To be fair, the Liberals could point to the fact that in reality they got their own way on the Cuts. They had argued that the Cuts should be delayed until Spring 2011, when the economic recovery would have taken hold. And that is pretty much what will happen. Not only were there very few actual Cuts in 2010-2011, but, in fact, the data shows that in November the deficit actually grew significantly as a result of increased spending on the NHS, and reduced tax take.

The majority of cuts have been back loaded on to the last three years of the four year schedule. But, that just shows how incompetent and inept the Liberal-Tory Government are. The Liberals were probably correct that the economy could have withstood a period of Cuts beginning from Spring 2011 – though it would undoubtedly have been unwise to go for the size of Cuts the Liberal-Tories are proposing – provided the economic recovery had taken hold. But, the whole of their narrative during the election, and particularly after it, of “hyping up” as Laws put it, the seriousness of the deficit, of the need for serious pain by the population has acted to scare the shit out of people, and scared people do not engage in increased economic activity.

Consumers began to think about the need to put some money aside, particularly if they or someone in their family worked in the Public Sector, and was likely if not to lose their job, to see their pay frozen. And as businesses see their customers retrenching, as those businesses too see the possibility of contracts from the Public Sector disappearing, as they see taxes rising, and foreign markets contracting, they too are not going to invest in new capacity. The Liberal-Tories tanked the economy simply by their narrative, now they will sink it with their austerity measures.

But, the pressure on the Liberal-Tories does not end there. The latest figures show inflation continuing to rise. As I have been arguing for the last few years, the Long Wave Boom will necessarily push up primary product prices in this phase as rapidly increasing demand cannot be satisfied by Supply that is constrained by low levels of investment during the Long Wave downturn. As the Boom continues in those dynamic areas of the global economy, these primary product prices are soaring again.

Copper recently hit a new all-time high, and the UN has warned about record high food prices. These prices are rising for reasons outside the control of developed economies such as the UK and US, but those rising prices will have a serious effect on the UK economy. The large amount of money printing that has been done is being soaked up in these higher commodity prices, and its feeding its way into manufactured goods, energy and transport. Oil prices are almost touching $100 a barrel again, and there are suspicions it might even go back to its all-time high of $147 a barrel. The pleas of western Governments to OPEC to increase output are facile. The high prices are not due to p-rice fixing by OPEC, but are a direct result of the Long Wave Boom, of rapidly rising demand, and a limited potential for increased Supply. In fact, its likely that having bumped up against the constraint of Peak Oil, some suppliers such as Saudi Arabia may have been damaging their own long term capacity in order to raise short term output. In short, the UK is likely to face rapidly rising levels of inflation even as the economy goes into a period of very low growth if not recession. We have experienced this kind of situation before. What makes matters worse is that under such conditions reduced levels of output leads to more inefficiency and rising unit costs because of underused capacity.

Its not clear where the burden of this will actually fall. Already, retailers have been saying they will absorb the VAT increase in order to maintain sales levels. If Capital believes this is a short term problem it may take the hit against profits in order to be able to sustain output and sales, in the hope of recouping larger profits in the longer term. But, if Capital thinks that this might drag on, it will seek to cut costs by putting increased pressure on Labour through job cuts, and pay cuts. That will set in a downward spiral. In fact, already we see some of that. Public sector workers are likely to face a real cut in income of around 5% as inflation rises and their pay is frozen. But, the private sector is not faring much better. Wages are likely to rise by around 3% in the private sector, but with inflation running at 5% plus, that still means a 2% cut in real wages. Its no wonder the Liberal-Tories decided to link Pensions and Benefits to wages rather than inflation.