Tuesday, 12 September 2017

UK Stagflation Intensifies

Towards the end of last year, I argued that the UK was headed for stagflation. Since then, UK inflation has continued to rise sharply, whilst economic growth has slowed significantly. Today's inflation figures showed CPI inflation rising faster than expected to 2.9%, up from 2.6%, whilst RPI now stands at 3.9%. Meanwhile growth has more or less come to a standstill. Stagflation is intensifying.

As I said last year, the current level of inflation is not yet at the levels seen in the period of stagflation in the late 1970's, and early 1980's, when it rose to over 20%, peaking in the early period of Thatcher's government. At that time, too, unemployment rose to over 3 million on official figures, and to around 6 million in real terms, if calculated on the basis prior to the fiddling of the figures that Thatcher's government introduced. By contrast, today, in a much larger working population, the 1.5 million unemployed represent near full employment. Of course, the 1 million people also on zero hours contracts, the millions of people forced into fake self-employment, because they can't get permanent full-time employment, means that we have high levels of under-employment, which is why UK productivity is so abysmally low, and is also one reason why wages have not been rising, as this pool of underemployed labour can still be drawn into the labour market, to increase supply.

Nevertheless, the RPI figure of 3.9%, which more accurately reflects the rising prices faced by ordinary families, is nearly twice the Bank of England's inflation target. The government uses CPI, because it enables it to index the payment of pensions, benefits and so on to this lower figure, and is a hidden way of screwing more out of workers, as what they actually have to pay for goods and services, and the VAT elements of those prices rises by the higher level of inflation. In fact, the real level of inflation is much higher than even the 3.9%, if measured against the things that ordinary workers have to spend their money on. That is before we even think about the effects of shrinkflation, where the suppliers of commodities try to hide the rises in their prices, by shrinking the contents of their packets etc. Then there is the huge rise in the cost of pension provision, as a result of the hyperinflation of share and bond prices, which means that monthly pension contributions into pension and superannuation schemes, buy fewer and fewer shares and bonds, from which to draw future income to cover pensions. And, of course, what is not included is the effect of austerity.

When a local council stops providing things like swimming pools, people have to use private leisure facilities, which invariably charge higher prices. When schools ask parents to provide books, or to make donations to the school to cover the basic things that previously would have come out of the schools budget, these all represent additional increases in the cost of living of ordinary working families.

Not surprisingly, as prices surge ahead, whilst wages fail to keep up, ordinary working people have to cut back on what they buy. That reduction in demand is one reason that UK economic growth has slowed significantly. But, another reason is Brexit. Businesses, based in the UK, are not going to make decisions to invest billions of pounds, in conditions where Brexit is creating uncertainty. The very fact that the investment does not take place, itself then takes that money out of aggregate demand, and causes the economy to slow down.

In many ways, this is a similar situation to 2010. At that time, the Tories were only threatening to introduce their insane policies of austerity. Yet, even the threat of it, was enough to cause the UK economy to go into reverse from the position of strong economic growth that had restarted under Labour. When the Tories actually did begin to enact their policies of austerity later in 2010, it caused the economy not only to slow down further, but to go into recession, and a period of stagnation that lasted until 2014. Today, it is merely the threat of Brexit that is acting to slow down the UK economy, if Brexit actually happens, the effect on the economy will be even more severe.

A large part of the inflation that the UK is suffering is due to the fall in the Pound, since the Brexit vote. In fact, the latest inflation data would have been worse were it not for the fact that in the last few months the Dollar has weakened, which means that all of those things like oil, which are traded globally in Dollars, have become cheaper in Sterling terms. And, oil itself has become cheaper. Yet, despite that, its clear that inflation is rising sharply, and that in the next couple of months, even CPI is likely to go above 3%. The Pound has continued to drop sharply against the Euro, particularly as the Eurozone economies are now strengthening markedly, and look set to move in the opposite direction to a stagnating Britain. We look likely to see the Pound fall beneath parity with the Euro, and, indeed, anyone changing Pounds for Euros, to go on holiday, is already finding that they only get around €0.87 for every Pound. 

This indicates the problem for the UK economy after Brexit. Taking the UK out of the EU economy still leaves an EU economy of around $14 trillion, as against the $2 trillion UK economy. If the EU imposes 10% tariffs on UK goods and services after Brexit, then EU consumers will easily be able to replace those British exports from within that huge EU economy. It will simply lead to import substitution by the EU, whose companies and workers will fill the gap left by the now too expensive UK imports. Indeed, because free movement of capital will remain after Brexit, many of those companies currently based in the UK that send exports to the EU, will shut up shop here, and move their operations to the EU, to avoid those tariffs, and other customs restrictions.  Especially, as a continually falling Pound increases the cost of their raw materials, and other imported components, which raises their costs, and unravels any export advantage they might have had from the lower Pound.

That will cause UK economic activity to slow down much more, and UK unemployment to rise sharply. Indeed, even the “Economists for Brexit”, like Patrick Minford have admitted that Brexit, and a resort by Britain to free trade, would mean that the remaining rump of UK manufacturing industry would be destroyed. The same would apply to agriculture. People like Minford are not bothered, because they are essentially the spokespeople for the financial services industry, and for the owners of fictitious capital, which they think will continue to be able to sell its services into Europe and across the globe. For them, mass unemployment in Britain is not a problem, but as such people said under Thatcher in the 1980's, a “price worth paying”. For them, it will be an opportunity to be able to employ cheap labour as domestic servants, cleaners, gardeners etc., as the casualisation of the economy expands to levels unthinkable today, much as happened in the 19th century.  It is the kind of "new economic model" that the Tories have talked about as they turn the economy into an equivalent of Batista's Cuba of the 1950's, based around gambling, the attraction of foreign oligarchs and crooks, and the provision of services such as prostitution to these decadent, parasitic elements.

Whilst, the EU will be able to easily engage in import substitution to its own benefit, the UK will not easily be able to substitute for all of those goods it currently imports from the EU. To the extent that the UK retained any kind of manufacturing industry after Brexit, it would still have to import huge amounts of components, and completed goods from the EU. If Britain imposed 10% tariffs on these imports, it would simply lead, in most cases, to a 10% rise in the UK price of those commodities, on top of the higher price caused by a falling Pound, which would either be passed on into the finished price of the UK product, or else would directly lead to a 10% increase in the prices paid by UK consumers for those products. Either way, it would lead to a huge reduction in the standard of living of British workers.

Already, we are seeing that the policy of austerity and pay restraint in the public sector is running up against its limits. As inflation rises, the Bank of England will be forced to raise its official interest rates, but even without that, as inflation rises, and the UK economy stagnates, its credit rating will be continually reduced, and lenders will only be prepared to lend at higher and higher rates of interest, much like happened to Greece, back in 2010. And, just as happened with Greece, and other economies, in 2010, as market rates of interest rise, so the price of UK bonds will fall sharply, and the capitalised prices of UK assets, such as property will collapse.

Unfortunately, as the stagflation, exacerbated by Brexit, and the further decimation of the UK economy, as Britain becomes isolated, will mean that large numbers of unemployed workers, and millions more surviving on low wages, and with no savings, and many more with tens of thousands of pounds of debt, will be unable even to take advantage of that collapse in property prices, to be able to provide themselves with a home at a reasonable price.

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