UK GDP for the first quarter came in at 0.5%. The government has tried to put a positive spin on this number, which is up from a pathetic 0.2% in the last three months of 2018. But, the truth is that 0.5% is a miserably low number for this phase of the cycle. It is only half the figure of 1.0% GDP growth per quarter that Labour achieved in 2010, for the last quarter it was responsible for. In other words, 9 years on from the economic recovery that Labour had bequeathed the Tories, they are still unable to even get to half the level of growth that Labour had put in place. In the intervening period, the Tories, via their insane policy of austerity, caused the economy to reverse that growth put in place by Labour, and instead sent the economy back into recession, followed by stagnation. Even now, they are unable to produce anything other than anaemic growth.
But, things are worse than that. The 0.5% figure is almost certainly flattering for the actual state of the UK economy. It includes a lot of inventory building by firms during the period, ahead of a potential Brexit, and there was also hoarding by UK consumers, who also feared that a No Deal Brexit would lead to food and other necessities disappearing from supermarket shelves. That has imposed huge unnecessary costs on businesses, who had to hold these additional stocks, including having to rent additional storage facilities for that purpose. More importantly, with Brexit not going ahead in March, and now being delayed at least until October, if not indefinitely, the previous stock building will be unwound, leading to lower levels of demand, and production, in coming months. Already, inside the current GDP data, it appears that there was actually negative growth for March.
Its likely that given the continued uncertainty over Brexit, the UK will struggle even to reach 1.5% growth for 2019 as a whole. Compare that with the 3.2% annualised GDP growth for the US, in the first quarter, and just how badly the UK is doing can be seen. US growth itself has been hit by Trump's crazy global trade war. Trump has imposed heavy tariffs on Chinese and European imports into the US. As a warning to Brexiteers, both of the danger of banking on doing any kind of beneficial trade deal with the US, but more importantly of the problems arising from imposing tariffs, the main effect of those tariffs appears to have been to have increased costs for US companies importing Chinese components, and on US consumers, who have seen the prices of consumer goods rise, as a result of the tariff, which acts as a tax on those consumers.
The tariffs do appear to have hit Chinese exports slightly, with a consequent effect on Chinese growth, but not enough to cause Chinese exporters to bear any of the cost of the tariffs, as Trump had claimed they would. Trump's tariffs caused Chinese growth to slow by around 0.3% over the last year, and slower Chinese growth also impacted the EU, particularly Germany, which exports a lot of goods to China. However, the Chinese government still trying to re-orientate their economy towards growth based on the domestic market rather than exports, and itself making a further pivot to Japan and the rest of Asia, via the Trans-Pacific Partnership that Trump took the US out of, has introduced measures to increase growth. Chinese Q1 GDP grew at a faster than expected 6.4%, which is probably one reason that latest data also shows the German economy started to grow faster ocne again.
EU growth, as well as being hit by the slowdown in China caused by Trump's trade war, has itself suffered from Trump's tariffs. But, it has also been hit by Brexit, which hangs like a cloud over the continent, leading some EU countries to begin to consider whether they should just hasten the UK's departure, so that they can get on with more important matters. As I have written previously, in other phases of the long wave cycle, Trump's global trade war policies would be enough, in themselves to cause a slowdown in trade and growth, leading to recession. It is an indication of the underlying strength of the global economy that, despite Trump's tariffs, and his other measures hitting global trade, such as the sanctions against Iran, Russia and so on, despite Brexit, the global economy continues to expand. Instead of causing a stalling of trade, and recession, it has caused trade to be directed into a series of alternative channels.
Fundamental to much of that is the underlying growth of employment. Even when unit wages remain more or less constant, a continual growth in the number of workers employed, causes the mass of wages to grow, and that increased mass of wages means that the demand for wage goods increases with it. As 80% of GDP is now accounted for by service industry, a large component of the investment arising from this additional demand for wage goods, is itself then an increased demand for labour, because service industries tend to be more labour intensive. At a certain point, however, as Marx describes, when this additional demand for labour cannot be accommodated by increasing the length of the social working-day, by lengthening or intensifying the individual working-day, or by increasing the amount of simultaneously employed labour, it becomes impossible to increase absolute surplus value. Moreover, as this demand for labour then also causes wages to rise, first by having to pay higher premium rates for overtime, and so on, and then having to pay higher hourly rates, that means that relative surplus value cannot be increased either, so that profits get squeezed.
When profits get squeezed enough, by these rising wages, as happened in the 1970's, the profits in some firms begin to turn into losses, so that capital is overproduced. We are not there, yet, in general. Although, both in the US and UK, pundits talk about current unemployment rates being the lowest since the 1970's, it should be remembered that the 1970's was a period of crisis, and rising unemployment. At around 4%, the unemployment rate is currently more than double the 1-2% unemployment rate that existed in the 1950's and 1960's.
But, the UK is in a bad place as far as that is concerned too. Productivity levels in the Uk are appalling. The low productivity is the inevitable other side to the higher levels of employment, in low value, low wage jobs that are only sustained by high levels of in-work, welfare benefits that are themselves economically inefficient and debilitating diverting potential surplus value away from where it could be used to accumulate capital in higher value, more profitable, and higher paying industries. Yet, despite these terribly low wages, and the massive subsidies provided to small inefficient businesses, those business are in serious trouble.
For several years, its been known that there are around 160,000 zombie businesses in the UK. That is businesses that are financially dead, and only exist on the basis of low interest rates, and the ability to roll over their debts. These firms are not even able to repay the capital sum on their loans. But, in a recent report by insolvency experts Begbies Traynor, showed that nearly half a million UK businesses are in severe financial distress. That is 14% of all UK businesses. If each of these firms employ on average 10 people, that is 5 million jobs that are under threat.
It doesn't take much to see that Brexit causing a downturn in economic activity, at the same time as global interest rates rise, UK interest rates rise faster, as a sinking Pound causes inflation to rise, and with wages rising to compensate, would push many of these firms over the edge into insolvency. The wage rises would then be short-lived as unemployment spiked to at least 3 million. But, as a large part of these firms will also be in the same category as the zombie firms with significant debts, its also clear that such large scale insolvency, and payments failures would have a significant impact on the banking and financial sector, as it saw these loans simply default.
For all the Tories hype about how well the UK economy is doing, it is clearly in a highly fragile condition, resulting from the last 9 years of their mismanagement, but also as a result of the economic model that was put in place by Thatcher and Major in the 1980's and 90's, and that was continued by Blair and Brown after them.
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