The Resilience of UK Demand

Pundits continue to be surprised that demand in the UK economy remains strong, despite rapidly rising prices. That resilience, is not what the ruling class of speculators, or its representatives in the state and financial media want to see. They want to see at least a slow down, or even recession. In the US, Larry Summers has been open about wanting to see unemployment rise to over 5%. They hoped that high prices, particularly for things like energy would quickly soak up households' spending power, so that they would spend less on other goods and services, slowing the economy, once more, as fiscal austerity had been used to do, in the past, so that the pressure on the labour market would ease, wages would fall and profits rise, whilst, also, interest rates would fall, and boost the price of the financial assets that are now the form in which that ruling class owns its wealth. There are a number of reasons why their hopes have been dashed.

The pundits point to the fact that prices are rising by more than the rise in hourly wages, meaning that real wages are falling. That would suggest that workers have less money to spend, and so should reduce their consumption levels, slowing the economy. But, as I've set out before, there are a number of problems with this idea.

Firstly, if you think prices are going to rise, there is a good reason to bring your spending forward, on all those things you can buy, now, and which are durable, even if you consume them later. For example, you might buy in large amounts of tinned goods, now, consuming them over the next few months, or if you were going to be thinking about buying a washing machine, TV, or car, you might bring that decision forward a few months, to buy it, now, at today's lower prices. And, that doesn't apply just to households. It applies also to businesses, especially, given that, as a result of a combination of Brexit, lockdowns, and so on, supply chains became dislocated, and so firms need to hold larger inventories than they did previously, to ensure continuous production.

With rising interest rates and falling house prices, where households might reduce demand is for property, which has been seen, both because they may find they can't afford properties at their currrent prices, and because, as property prices fall, there is a clear incentive to wait for them to fall further, so as to buy at those lower prices. That process is at an early stage, but it means that there is still a lot of money in the possession of households that might have gone to house purchase that is now available to fund other types of consumption. The pundits tend to associate lower property and asset prices, with a negative wealth effect, causing consumption to fall, but, as set out above, and as I have described elsewhere, in looking at how liquidity flows from assets into the real economy, in reality, when asset prices fall, it creates a release of capital and revenue available for consumption, both personal and productive.

Lower land prices means farmers or builders have a release of capital to be used to employ more workers, machines and so on. Lower share and bond prices, mean pension funds can buy more of these assets to fund future pension liabilities, meaning firms have to use less of their profits, and workers less of their wages, to fund pensions, leaving more profits and wages for consumption, both personal and productive, and so on. The higher interest rates that have gone along with higher inflation, have brought about that shift from assets to consumption, but its still at an early stage.

Secondly, although prices are rising faster than hourly wages that doesn't mean that household incomes are rising slower than household expenditure. There are a whole series of reasons for that. The rise in hourly wages does not, for example, take into account the payment of numerous other bonuses, allowances and so on. In the 1990's, local councils found that they could not retain or recruit a number of types of workers such as environmental health officers. However, they were restricted in being able to raise wages. What they did was to introduce a number of other incentives, such as the provision of lease cars, on favourable terms, to employees in those jobs.

As firms have found difficulty in retaining and recruiting workers following the ending of lockdowns, there have been a plethora of signing on bonuses and other such ad hoc payments, and non-wage benefits that contribute to incomes. In the current wage bargaining rounds, we have seen nurses offered a one-off lump sum pay rise, in addition to the smaller increments to hourly wages, for example. The purpose of these payments, is also not just to recruit and retain workers in those spheres.  By massaging the hourly earnings figures in a lower direction, it adds to the ruling class propaganda that workers are still in a weak bargaining position, that wages are failing to keep up with prices, and so on, and so presses down on all other negotiations. The advantage, then, also of the one-off payments, such as that offered to nurses, is that the employer can try to ensure that, in future negotiations, it, indeed, is not integrated into the wages of the workers.

There is another reason why the hourly wage data doesn't reflect the position of household incomes, and that is a compositional effect. If we take the wages of a series of types of workers, such as brickies, bakers, bus drivers and bin men, it may well be that the hourly wages of each of these groups of workers rises by say 5%, but suppose we take a series of other types of workers such as cleaners, cooks, care workers and cab drivers, whose hourly wages also rise by 5%, does this mean that household incomes from all these workers rise by an average of 5%? The answer is no, because it depends on the absolute level of wages of each group, and the number of people employed in it. Suppose the average hourly wage of the first group is £10, and of the second group £8. If 20% of the workers in the second group, get jobs in the first group, then their hourly wage will rise, not by 5%, but by 25%!

Given that, with an increasing shortage of labour, workers have been able to move to better paid jobs, the rise in the hourly wage for different types of jobs, becomes a distraction and distortion. And, indeed, as I've set out before, the average increase in wages for someone simply moving jobs, is around 14%. That clearly does not apply to the whole workforce, who do not move to better jobs, and who remain in their same job, but for a sizeable proportion of the workforce, it is the case, and represents a significant increase in income, over and above inflation, and so income available for additional consumption. That also, over a period, puts pressure on hourly wages too, because employers seeing that their workers are able to move to other better paid jobs, face increasing problems recruiting and retaining labour, unless they also raise wages. For all those types of business that have relied on poorly paid workers, they have to, now, become more efficient, usually meaning that large numbers of such small zombie companies go out of business, and a consolidation takes place of their capital.

And, looking at household incomes, as against individual hourly wages this is also important, because most households are not comprised of single individuals. If, just a third of households see someone within that household move to a better paid job, paying on average 14% more, that is the equivalent of all households seeing a rise of around 5%, on top of the overall rise in hourly wages, so that this represents a rise in overall household earnings above the rise in household expenditure due to inflation, enabling additional consumption.

The most obvious and dramatic form of that is where households see one of their members go from unemployment, or part-time employment, to full-time employment. A household that had one member earning £30,000 a year, and now has one earning £31,500, plus another earning £20,000 a year, has obviously seen an increase of household income of around 66%, way in excess of the 10% increase in their household expenditure due to inflation. Whilst, its true that employment levels have only got back to those preceding the lockdowns, the point is that they have risen dramatically compared to those during lockdowns, giving an immediate and significant boost to current household incomes available for consumption.

But, the ability to fund consumption is not solely down to the rise in incomes either, but is affected by savings, and, during lockdowns, because expenditure was artificially curtailed, whilst incomes were maintained via furlough and other such payments, household debt was reduced, meaning that balance sheets were put in a position to finance current consumption, including also from savings. Here also is a further factor, arising from rising interest rates. Although a large proportion of UK households have little or no net savings (about 25%), a considerable proportion do, and as interest rates have risen, so have rates on deposits. Again, the fact that these rates are negative in real terms, compared to inflation, does not tell the whole story.

If you have £100,000 of savings, which now pays you 3% interest, compared to near zero in the last few years, that is still £3,000 of interest you now have that you didn't, and which you have to spend, in addition to what other increase in your income you might have received. Again, overall, the rise in interest rates will act to reduce demand for property, leading to falling property prices, but is not likely to reduce demand for consumption goods much, if at all, as they are bought out of income not borrowing. The fall in asset prices releases capital and revenue for consumption, and the rise in interest rates leads to higher revenues for savers, who then have money to also spend on additional consumption. One of the areas where this is significant is in relation to the large number of pensioner households, especially as these have a higher proportion of their wealth in financial assets.

The government's triple lock means that state pensions have been indexed linked to inflation, so, unlike hourly wages, these incomes are, at least, rising in line with prices. But, again, the devil is in the detail. Suppose you are a pensioner household of two, with combined state pensions of £15,000, and expenditure of £12,000. With a 10% increase in both that means that pension income rises to £16,500 and expenditure to £13,200, so saving rises from £3,000 to £3,300. If, however, your expenditure was £16,000, you go from needing to dip into savings, borrow, or do additional work amounting to an additional £1,000, to being short of £1,100. In general, pensioner households do not have mortgages, or if they do, they will be relatively small, and consequently, they are not hit by the rising interest rates. On the contrary, having paid off mortgages and so on, they are most likely to have accrued savings, and so benefit from the rise in interest rates on savings. They do not, however, generally, benefit from the other effects listed earlier, of having household members going from unemployment to employment, and so on. However, as labour shortages persist, that remains also a further potential for such households to boost incomes and so expand consumption.

In Britain, a large proportion of workers are employed by the state. The NHS is the largest single employer in all regions of the country. But, the state accounts for around 40% of economic activity, with large numbers employed as civil servants, local government workers, teachers, police and so on. These workers also have inflation linked pensions, and that contributes to the protection of those pensioner households, from the effects of inflation on their consumption. If we take the pensioner household example above, and now add in this works pension, so as to obtain a household income of £30,000, the effect becomes fairly obvious. With expenditure of £15,000, and 10% inflation, savings now go from £15,000 to £16,500, and if such a household has £100,000 of savings, with 3% interest, now on those savings, that is an additional £3,000 available for consumption, or an additional £4,500 a year, in total.

In the 1950's, and early 60's, which is the equivalent of the period we are in now, the growing economy did not initially manifest itself in rapidly rising hourly rates of pay. The same has been seen in other periods, as described by Marx in Capital, and Theories of Surplus Value. Marx described, how, as capital required more labour, and having used up reserves of peasants, and others thrown off the land, it turned to employing women and children. If to reproduce labour-power, a male worker previously needed to earn a wage of £10 a year, to provide for a family including their wife and four kids, as the demand for labour rose, the capitalist could actually reduce the male worker's wages to, say, £6 a year, whilst employing his wife and two kids, paying them £5 between them – though often the money was just paid to the male worker for the employment of the family labour. The consequence, however, was that the household income rose by 10%, from £10 to £11.

After WWII, this was seen again. Male workers saw overtime rise significantly, but also married women again entered the workforce, with this same effect that, hourly wages did not rise rapidly at first, whilst household incomes did rise substantially, funding the big rise in household spending on the new ranges of consumer durables such as washing machines, TV's, fridges, vacuum cleaners and so in, and also later motor cars and foreign holidays. Only in the 1960's, as the potential to increase the workforce and social working-day further, by such means, ran into barriers, did hourly wages start to rise, leading to wages squeezing profits, and, in the 1970's, thereby a crisis of overproduction of capital.

Although the lifting of lockdowns has seen a surge in demand for labour, the actual rise in demand as against supply of labour has been taking place since the start of the new long wave upswing in 1999. I've previously referred to the rise in the US Quit Rate as an indication of that in respect of the US labour market, and in both the US and UK, it is seen in the fact that the number of vacancies in proportion to the number of unemployed workers is historically high. But, a look at the total number of jobs to total workforce, for the UK, also illustrates this point, as seen in the following graph.

(Source John Authers Points of Return Blog)

As can be seen, available jobs remained slightly below the available workers, up to 2008, when the global financial crisis led to a sharp drop in available jobs. But, by 2016, that gap was back to its earlier level, and starting to close noticeably. By 2020, the gap had nearly closed entirely, prior to lockdowns, when it opened again, but following the ending of lockdowns, has not just closed, but has seen the number of jobs exceed the number of available workers, creating the current labour shortages, and pressure on wages. That is also exacerbated by Brexit, and the ending of free movement of labour, but was a process already underway.

So, the expectations of the ruling class of speculators and their representatives, of a significant drop in consumption by households, leading to a drop in capital accumulation and hiring by firms, leading to a drop in the pressure on wages and interest rates boosting profits and asset prices is still unlikely, and as employment continues to rise, and wages do begin to squeeze profits, central banks will continue to make liquidity available so that firms can raise prices to mitigate that profits squeeze, leading to a more persistent level of inflation. Already, we saw the Bank of England do more QE, when it should have been doing QT, in the face of a number of pension funds being threatened by the sharp rise in bond yields, last Autumn, we have seen the Federal Reserve do the same following the failure of SVB, Signature and problems for its regional banks, and we saw the SNB get involved in bailing out its banking system, as Credit Suisse went bust.

The reality is that, despite all the talk about tightening liquidity, vast oceans of it are still swilling around the global economy. Looking solely at additional liquidity created by central banks again gives a false picture. That is being reduced, other than for the examples given above, but that is not the only source of liquidity. As Marx describes, capitalist firms themselves create additional liquidity, via the extension of commercial credit. As economic expansion continues, firms simply invoice more, taking payment for what is sold later, and as each of these transactions cancels out others, so less actual currency is required in circulation to fund any given level of transactions. But, in addition to that, there is a huge stock of liquidity that has been created, most of which was tied up in the purchase of assets, and which can flow out of assets, as asset prices drop, and into the real economy, as I have previously described.

This graph illustrates, beautifully, what I have described on numerous occasions. The expansion from 1959 to 1979, follows a very gradual upward trajectory, as would be expected with the growth of the economy itself. From 1979, there is a marked increase in the slope, which flattened again during the 1990's, but then rises in a pronounced manner, after 1999, as liquidity is injected in response to the Tech Wreck of 2000, and the potential for further falls in asset prices, and again pronounced in 2008/9. The curve steepens further, particularly following the onset of lockdowns, and the introduction of various income replacement schemes by the government. The reduction, now, from QT, is put into perspective, by the tiny dip, compared to the huge preceding upward curve.

In the following charts, we see the further effect of this prolonged increase and accumulation of liquidity, in terms of stock and flow, this time in relation to M2, rather than M3. The huge rise in liquidity in 2020/21, is shown in relation to the left hand chart showing year on year growth, whilst the accumulation of liquidity as a stock, is shown in the right hand chart, again emphasising the previous points about the extent to which this phenomenon is one that has arisen in the last 40 years.

Britain has different conditions to the US, and EU, of course. It has Brexit, which has caused its costs of production to rise, and its rate of profit to fall, slowing its potential for growth. Brexit was the project of the petty-bourgeoisie, and, of course, they were not concerned by such factors, based on their interests, and experience of the last 40 years. On the contrary, their inefficient small capitals are threatened both by competition from larger capitals, and by the minimum standards, that the larger-scale capitals, operating at an EU level, take for granted. Brexit protectionism, meant those small British capitals could sustain their higher prices, required to eke out a profit, and they assumed, on the basis of workers' weakness over the last 40 years, that they would simply pass on these higher prices to workers without workers being able to raise wages to compensate. In that they were not alone, because the ruling class speculators, also assume the same thing, not just in Britain.

But, Brexit also simply compounded a problem that capital was facing in that regard, as described above, which is that material conditions have been changing since 1999, and only held back by the effects of fiscal austerity, QE, and lockdowns. That is the using up of the relative surplus population, a slowing of productivity growth, as the effects of the last innovation cycle wane, and so the ability of workers to obtain higher wages. The ending of free movement by Brexit, both increased costs, and reduced the rate of profit, putting further pressure on prices, but also, exacerbated the shortage of labour, and meant that workers were in a stronger position to demand higher wages to compensate for those higher prices.

That is a variant of what has been seen in both the US and EU. In the EU, the effects of the NATO/G7 boycott of Russian oil and gas, looked set to cause it to go into recession, last Winter, but a mild Autumn and Winter seemed to enable it to dodge that bullet. However, the massive rise in EU energy prices to consumers, also led to workers taking to the streets, in protest at that self-inflicted injury, at a time when workers were facing high levels of general inflation, to which they were responding with corresponding wage demands. The protests against the energy boycotts, were often led by the far right, again indicating the bankruptcy of both social-democracy, and sections of the centrist Left that had tied itself to NATO imperialism against Russia~China, in preference to defending the interests of EU workers. The EU, was, however, led to respond, by introducing a wide range of energy price caps, faced with this rising revolt, as did the UK government. That again, was not what would have been anticipated, and acted to keep money in workers pockets to spend on other consumption.

Indeed, the EU has not only avoided recession, but appears to be seeing upward revisions for economic growth in coming months, again dashing the hopes of the speculators. Whilst Britain, has additional problems due to Brexit, it does not stand in isolation, and an increase in EU economic activity will also impact the British economy. However, the other factor is China, which came out of its lockdowns following widespread revolts from its own workers, at the end of last year. Already, that has seen Chinese GDP rise by an annualised 4.5% in the first three months of this year. Much of that growth has also been derived from a rise in Chinese domestic consumption, as against its previous dependence on exports. That also looks set to continue to grow in coming months frustrating all of the predictions of global recession.