“The workers... battle-cry must be: 'The Permanent Revolution.'” — Marx and Engels, 1850

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The UK economy slumps

The UK economy slumped in the first quarter of 2009, in the biggest contraction since the rise of Margaret Thatcher in 1979. GDP fell 1.9% after declining 1.6% in the previous quarter.[1] Particularly vulnerable to the crisis of the world’s financial system, the UK, with the greatest dependency on financial investments of any nation in the world, has seen the revenues of its banks and finance houses slump, while at the same time desperately trying to recapitalise its banks against their current losses.

UK business services and finances shrank 1.8%, the most since records for the category began in 1983. Manufacturing contracted 6.2%, the most since at least 1948. This is the first time GDP has contracted by more than 1% for two consecutive quarters since modern records began after World War Two. UK unemployment rose in March to the highest level since Gordon Brown's Labour Party came to power in 1997.

Debt, debt, debt

Alistair Darling, New Labour’s chancellor, forecasts that the budget deficit this year will rise to £175 billion ($257 billion) or 12.4% of GDP, the highest of any G20 nation. But Labour’s money has not been first of all directed towards reflating the economy, saving jobs or staving off crisis. Its Keynesian reflationary measures, like its VAT cut and car scrapping scheme, are only around 2% of GDP, amongst the lowest of any of the major powers. Rather Labour has spent £1.4 trillion ($2.1 trillion) bailing out British banks.

The government has approved the sale of a record £220 billion of gilts, or government debt, in the current fiscal year – 50% more than last year, more than doubling government debt, which will rise from around 37% of GDP to around 80% of GDP. As debt is paid for out of taxes, this will put an ongoing pressure on government revenues and serve as a perpetual excuse to cut public spending.

It will be supplemented by so called quantitative easing. The Bank of England is printing £75 billion to buy bonds after it cut the key interest rate to 0.5%, the lowest since it was founded in 1694. This aims to reduce interest rates by lowering the price of guilts without adding to the debt burden. Unlike the sale of gilts, it increases the states assets at no cost or devalues its debt by the same amount. Indeed the effects of quantitative easing are built into the government’s estimates for nominal (i.e. not real) GDP growth after 2011. New Labour's forecast growth rates, roundly derided as too optimistic, are based on an accounting trick. By increasing the money supply by around 5% of GDP, the nominal value of GDP will increase by the same amount.

Markets not happy

But the UK is not the USA. Debt holders know when they are being taken for a ride. As the Bank of England has opened the printing presses, so the pound, gilts and UK corporate bonds have fallen on concern Britain will lose its AAA credit rating. Moody’s Investors Service said the government is “taking risks” with public finances. Britain’s “balance sheet is deteriorating rapidly, due to a combination of weakening revenues” and bank bailouts, “the maintenance of the government’s AAA ratings relies on the assumption that the current deterioration of debt affordability metrics is reversible over a foreseeable horizon," if the government chooses “to operate with a structurally higher level of indebtedness, this would likely have rating implications over time”.

By printing money the UK government devalues the debt it owes. That's no good for the City. The financiers are determined that they will not be the ones to pay for the crisis that they created.

Battle postponed

The scale of the crisis was anticipated in Alistair Darling's budget earlier this week. Darling's strategy is simple. He aims to ride out the worst of the recession with unprecedented levels of government borrowing before making the working class pay a couple of years down the road. The predicted contraction of public services in 2011 and after is, as the Institute of Fiscal Studies has shown, more severe than that attempted under Thatcher in the early 1980s. Its even worse when the effect of rising debt repayments are dialled into the calculation.

Darling’s pledge to raise taxes on the rich has been hailed as the return of class politics. It is not. Darling will increase the top rate of income tax from 40% to 50% and close loopholes for pensions, with the aim of producing an estimated £7bn from the ultra-rich financiers who will now control the UK's state finances. But only so that he can pay them a part of what he now owes them.

Oh and Kate Moss and Wayne Rooney may lose £500,000 a year.  

The real victims of the state's indebtedness will be the workers. Darling aims to postpone the class war for a couple of years – at least on New Labour’s timetable. He wants the assault on public services to start in 2011, when he hopes that the world economy will once more be on the upswing.

For the first time in a decade, whoever is in power, there will be a major class wide assault on public services. The piecemeal privatisation. The cushioning of PFI with new money. The replacement of public with private services. That is all over.

Darling’s budget is a declaration of war.
 

[1] Note, unlike the USA the UK does not report its GDP at an annual rate. To get the equivalent with the USA multiply by four, so this quarter was -7.6% annualised.

Fri 24, April 2009 @ 16:50

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discussion of this article

Arthur Bough said…

Bill,

Markets, unhappy? The Bond market is showing signs of unease, but the FTSE didn't flinch when the news was announced and ended the day higher by around 130 points! The provision figure is based on the first two months data, and all the signs are that things started getting less bad during March, so my guess is the revised figure will come in higher. Recent manufacturing figures, PMI data and the CBI survey has shown some improvement, and March Retail Sales were up more than 1%.

I think that Darling is playing politics and can't say what the real game plan is, but has been seen before. Whenever debt like this has been built up it has been simply inflated away. That happened in the 1960's. But, no government can say openly we are going to let inflation rip twelve months or two years down the road - especially a Government that thinks the Opposition might be the ones who have to resort to it!

Its possible that in a couple of years they will cut spending, but my guess is that they will just not increase it in line with inflation.

Fri 24, April 2009 @ 20:51

Llin Davies said…

On the Kate Moss point. I noticed today the BBC ran a story this morning about "Benefit Cheats" living in Spain. The story was highly misleading giving the impression that anyone living in Spain and getting benefits other than Pensions were in some way guilty of cheating, together with a load of Sun or Mail style anecdotes from people who claimed to know someone who knew someone who got this that or the other who shouldn't have done.

The story contrasted sharply with the response to the small increase in tax on the rich, which concentrated on whether it was fair or not, and then even had some rich git talking about, basically how the rich would get out of paying it anyway!!!

Supposed Benefit Cheats, perhaps cost the Government a few hundred million pounds, made up of pindling amounts to those that get it. By contrast the Inland Revenue and Customs and Excise admit that the rich get out of paying taxes amounting to several hundred billion pounds!!!

Fri 24, April 2009 @ 20:58

vngelis said…

By contrast the Inland Revenue and Customs and Excise admit that the rich get out of paying taxes amounting to several hundred billion pounds!!!...

L Davies

The reality is that Customs and Excise has now brought the Offshore Non-Tax status for corporations inshore. The state subsidies to all the major banks imply that all the tax they paid over the last decade has now dissapeared.

On top of that Inland Revenue sold off its buildings to an Offshore company in some sale and leaseback scheme and one of its directors resigned and resurfaced as a Barclays Bank Tax Management specialist.

Inland Revenue therefore has ceased functioning essentially other than an arm of big business to cripple small business.

Sat 25, April 2009 @ 07:42

bill j said…

As you say they do intend to inflate it away. Indeed quantitative easing which will increase nominal GDP by 5%, is the mechanism they have designed to do just that.

There are other imponderables. They now own the majority of the UK banking sector, RBS has just announced £2.5bn profits for the first quarter. It won't be long before all the banks have returned to profit - profits which now accrue in large part to the UK state. Even the worst estimates for world credit losses from the IMF at $4.1 trillion would represent a slowing in the rate of losses compared with the last quarter of 2008 and a consequent recovery in the banks. Incidentally even with these losses the IMF only estimates banks require between $300-$500bn to recapitalise themselves, when internal profit generation is taken into account. But even that is a highly arbitrary and speculative figure. It leaves out of account the present stock market rally, which as banks count shares amongst their core capital, will in and of itself ease the requirement for further funds.

And then there is the duration of the recession itself.

Going into the summer of last year, there was a mild slow down, which accelerated out of control as a result of the credit crunch. The impact of that explains the scale of the contraction over the last 6 months. But the world financial system, while still creaky, has responded to the activist approach of the world's central bankers. Mergers and acquisitions have started again, as with lending, and in the US the major banks, Citi, Wells, Bank of America, Goldman, JP Morgan etc have returned to profit, albeit exaggerated by the usual accounting fiddles.

What is different about this quarter is that it is now concentrated in an inventory adjustment, as trade and industrial output has if not started to grow at least started to stop slowing.

China has survived the crisis, its banks have leant more in the first quarter of 2009 than in the whole of 2008 and the exports of those economies most dependent on it, Taiwan, Japan, South Korea have all started to pick up in the last month.

The US will announce figures this week, which will show another very sharp fall, but with the rate of unemployment rises probably slowing over the last month. An interesting fact to throw in, in the last 6 recessions, the recovery has begun just 8 weeks after the peak of new unemployment claims.

Sun 26, April 2009 @ 09:50

Arthur Bough said…

Bill,

I agree with all this. I now beleive the recession is over in the sense that this will be the last quarter of negative growth. See:http://boffyblog.blogspot.com/2009/04/recession-is-over.html.

This morning the share price of RBS went up to over 50p, which means that all those shares bought by the Government at 30p, are now showing a significant gain for the Government's coffers! I wrote some months ago that the fall in the price of RBS shares to 10p on the back of rumours of full scale nationalisation, and short selling, were a head fake. It was almost certainly rumors started by the big boys doing the short selling to clear out the small investors ready for the run-up. As I said, and as you confirm here, Banks remain extremely cash generative businesses - even more so given that they are now almost getting money for nothing, whilst interest rates charged have risen.

In January I wrote, "If RBS, which only a few weeks ago was trading at 65p, rises from its current 10p to £1 - which would still be only a sixth of its level a year ago - they will make 1,000%. And because of the interlinking nature of the financial system this increase in the price of Bank Shares will strengthen their own Balance Sheets, further loosening the crunch, and once again facilitating an icnrease in their lending activities."

http://boffyblog.blogspot.com/2009/01/green-shoots.html

In fact, its only been just over 3 months, and they've already risen to half that figure. Latest data from the US shows Pending home sales rising by more than 3%, and Construction has risen for the first time since last September.

And importantly, as you point out, the number of initial jobless claims has begun to fall. All this before virtually any of the stimulus money has found its way into the economy. Its also been announced that China's growth is likely to rise to 7% next quarter, and Taiwan has opened up the possibility of Chinese companies buying large stakes in Taiwanese companies as relations between the two economies become closer.

I think that a lot of the tak around this recession has been hype by a 24 hour news media that always needs to report things in apocalyptic terms. The Financial Crisis certainly has been apocalyptic, and the world economy did suffer the equivalent of cardiac arrest as a result of it last September, but the underlying economic fundamentals remain robust. It is marked now by a major restructuring of Capital in old industries in the West - e.g. the Auto industry - which I think will facilitate even stronger growth in the future. Another part of the problem is a tendency by both the left, and by bourgeois economists to view things in US/Eurocentric terms. There is a failure to recognise just how much, and how significant is the shift in the locus of economic activity, and future historical development to the East.

Tue 05, May 2009 @ 10:10

vngelis said…

"Bill,

I agree with all this. I now beleive the recession is over in the sense that this will be the last quarter of negative growth. See:http://boffyblog.blogspot.com/2009/04/recession-is-over.html."

The German economy which is the biggest exporter in the EU saw its economy drop by 6.9% in the last two quarters.

If this is indeed the end of the recession and we are not just about to enter a third wave of collapse, the proof of the pudding will be not in what we have in our heads, but what happens on the ground.

Sun 17, May 2009 @ 19:44

vngelis said…

Another 'sign' that the 'recession' is over mantra from globalists.

Who are you all kidding on this website?

Yourselves or the people reading it?

Either which way the hard facts on the ground dont subscribe to your

'theories'...

British economic collapse rivals Great Depression

http://www.telegraph.co.uk/finance/financetopics/recession/5901961/Br...

The collapse in Britain’s economy now rivals the worst days of the

Great Depression, it has emerged.

By Edmund Conway

24 Jul 2009

Economic output shrank by 5.6pc in the 12 months to the middle of the

year, according to official figures which shattered hopes that the

recovery has already begun.

Sat 25, July 2009 @ 13:24

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