Wednesday, 25 July 2012

UK Economy Crashes

The latest GDP figures for the UK are disastrous! Growth for the 2nd Quarter of 2012, fell by 0.7% as against the 1st Quarter, which was itself down on the last Quarter of 2011, which was itself down on the 3rd. Quarter of 2011. In other words the recession is deepening, and the pace of decline is speeding up. Measured on a year by year basis, GDP was down 0.8%. Year on year figures are likely to deteriorate further from here. In fact, if you add this figure to the previous month's losses, the economy has shrunk by 1.4%!  That means that the UK economy is following the path down the death spiral that other economies such as Greece, Ireland, Portugal and Spain have slid having adopted the same kind of Austerian economic policies.

Two years ago, the Liberal Tories ridiculously claimed that Britain was in danger of suffering the same fate as Greece. It was ridiculous, ebcause at that point the UK economy, under the influence of fiscal and monetary stimulus was actually growing respectably at around 2.5%. The graph of its recession and recovery showed the typical "V" shape. Now, as a direct consequence of the illiterate economic policies adopted by the Liberal-Tories, and in large measure because of their manifest incompetence, the economy really is following in the footsteps of Spain, if not yet Greece. But, then the more it crucifies its economy with Austerian economic policies, Spain itself is looking more like Greece.

Those policies have cratered Spanish economic growth, sent unemployment soaring to Depression levels, and tax receipts through the floor. As a result, its debt, and borrowing requirements are becoming worse, not better. Despite, offers of EU support for its banks, Spanish Bond Yields have soared to unsustainable levels. Benchmark 10 year Yields are now approaching 8%! Worse, its Yield curve has now inverted. That means that the Yields on shorter term Bonds have gone higher than on longer term Bonds. This is always a classic sign that the market believes that the economy is going to deteriorate further! Unless, EU politicians get their act together and sort out the debt problem, the markets will continue to force these Yields higher, and the Eurozone will simply fall apart. That will make the Lehman's collapse look like a blip. Already, the strains in Spain are not just causing economic problems. The country is increasingly suffering a social breakdown, only mitigated by the continued importance of family structures, and the ability to scrape a living from the land. It is also suffering political problems, as the also heavily in debt Regions of Spain, seek financial support, leading the more affluent regions, like Catalonia, to seek independence. This kind of growth of Nationalism is dangerous for Europe.

Countries like Greece, Spain and Portugal, and even Italy do not have a very long history of bourgeois democracy. When I was a young man, Greece was ruled by the Colonels, Spain by Franco's fascists, and Portugal by Caetano and his military junta. Italy like most European states only achieved bourgeois democracy at the end of the 19th Century, and it was overthrown within just a few decades by Mussolini's fascists. A growth of Nationalism across Europe, at a time when Nationalism and various forms of clerical-fascism is threatening Europe's Southern, and South-Eastern flanks, let alone the even shorter history of bourgeois democracy to its East, and at a time when economic disaster is being created by misguided Austerian economic policies, is very, very dangerous.

The UK GDP figures show how phoney the other economic data put out by the Government is. It shows the unemployment data for a start is totally unreliable. The figures showing unemployment falling is clearly rigged. Its likely to be due to people who can't get benefits for one reason or another, giving up claiming. In part, some of that is because people will also have made themselves self-employed, having given up on getting a job. But, that is phoney too, because anyone who has become self-employed under conditions like those we have now, will tell you, that most of the time they have no work! The majority of small businesses, let alone the self-employed go bust inside a year. Within five years that figure has risen to around 75%! In addition, large numbers of people who are counted as employed, are now only employed part-time, or on temporary contracts! This is hiding the real employment and unemployment situation, but it can only do so for so long.

The other phoney figures are those in relation to house prices as I've pointed out in the past.  A year or so ago, the OECD said UK house prices needed to fall by 40% to get back to their historic average.  Now the IMF has said that it sees the need for house prices to fall by around 20% compared to wages.  But, wages themselves are falling by around 8%, which means a 30% fall.  In fact, the "official" house price figures provided by the Estate Agents and Building Societies are a joke.  They only refer to Asking prices not actual selling prices, but even their figures for Asking prices are unbelievable.  The house next door to me was put up for sale 4 months ago, for £450,000.  Already, they have changed agents, and slashed £50,000 (more than 10%) off the price.  A look around shows that is common, and prices are being slashed by around 30% in many cases.  Yet according to the official data, prices are basically flat!  When you look at what people are actually selling for, the figures are even lower than that.  There is a concerted attempt by the Government, the Media, the Banks etc. to massage this data, because if house prices collapse, Banks will no longer be able to hold back from foreclosing on mortgages in arrears, that will cause a wholesale firesale, and the £2 Trillion of private debt owed to the banks in the form of mortgages, credit card debt etc. will go bad, making it impossible for the banks to survive.

So far, the Liberal-Tories have only implemented about 6% of their austerity measures. The fact, that things have deteriorated so much, and so quickly despite that, is due to the incompetence of the Government, which began by talking down the economy in 2010 with its ridiculous warnings that the economy was in the same condition as Greece. But, as the austerity measures continue to eat away at the foundations, and fabric of the economy that situation can only worsen as it has done in Greece, Spain, Portugal and Ireland. Even reversing course at this point, will take some time before it starts to have any effect. As I've pointed out before, if you are riding a bike, the hardest thing is to build momentum. When you have done so, you can move into a higher gear, and move along faster for less effort. If you apply the brakes, and lose momentum, you have to start all over again. The fiscal-monetary stimulus used by the last Labour Government had built the momentum. The Liberal-Tories have applied the brakes!

They and other EU countries might be saved simply by the economic cycle. For the last thirty years there has been a short term cycle of around 3 years. It coincided with the Credit Crunch of 2008, and also was manifest in 2011. These short term cycles usually last for around 9-12 months. That means this short cycle should turn up by the end of 2012 or the start of 2013. Everything else being equal that should drag economies back into growth. But, everything is not equal. The Austerian economic policies in the UK, and other EU countries are artificially cratering economic activity. Moreover, if these policies are continued across the Eurozone, and nothing is done to resolve the debt crisis, the possibility is that the whole thing could break apart. In the past I've said I thought there was a 50-60% chance that EU politicians would not resolve this situation. Given more recent actions by those politicians I'd say that risk has now risen to more like 75%!

Certainly, the Liberal-Tories seem like startled rabbits caught in the headlights of an on coming car, as they seem totally incapable of responding to the situation other than by repeating the nonsensical mantra they have chanted for the last two years, that there is no alternative, and that its all Labour's fault. After they have been in charge for more than two years, and things have got decidedly worse, that is sounding even more inane than it did two years ago.

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